Weak Economic Data Spurs Massive Bond Rally, Historic Yield Curve Inversion

Bonds rally significantly as Treasury curve becomes most inverted since 1981. Swap rates and Treasury yields plummeted today following weak PPI and retail sales data that was released early in the session. The bond rally saw the yield curve invert to its greatest extent since 1981, with the inversion now twice as strong as it was in the lead-up to the Great Financial Crisis. The plummet in Treasury yields was slightly offset by hawkish Fed commentary, as two officials called for more hikes despite the soft data. By the session’s end, the 2-year fell over 12bps to 4.08% while the 10-year yield fell an even greater ~18bps to 3.37%.

PPI and other data releases support continued inflation slowdown. Headline PPI declined -0.5% in December vs. -0.1% estimates and November’s 0.3% increase. Core PPI increased 0.1%, which was in line with expectations and lower than the 0.4% growth in November. On a year-over-year basis, headline PPI was up 6.2% vs. the 6.8% estimate and November’s 7.4% increase. Similarly, core PPI was up 5.5% on the year compared to 5.6% estimates and 6.2% in November. These figures came alongside retail sales and industrial production data, both of which were significantly lower than estimates and last month’s readings. Together, these releases point to a continued inflation reduction.

Day ahead. Tomorrow’s session features plentiful Fed commentary, with Susan Collins (hawkish non-voter), Lael Brainard (dovish voter), and John Williams (hawkish voter) set to speak. The morning will feature building permit, manufacturing, and initial jobless claims data, all of which are set for release at 8:30 AM.