2s10s Yield Curve Inversion: Flattest Since May

Steep start to the week. Swap rates and Treasury yields bear steepened once again, continuing much of last week’s trend as the 2-year yield stayed flat at 4.76% while the 10-year yield climbed 5bps to 4.09%. It was the hawks that dominated today, with multiple Fed speakers suggesting that rates may need to stay elevated to cool inflation. Thursday CPI and Friday PPI could prove to be inflection points for Fed officials, with both forecasted to increase from June’s levels. 

“Data-dependency” remain the operative words. Several Fed speakers highlighted their data dependency today, as Governor Bowman said that she expects more hikes but will follow the data while President Williams echoed the sentiment in his comments. What does this mean for rates? Well, markets see a 90% chance of a Fed hold after September, and only a 30% chance of another hike this year. Any inflation surprises will be closely watched and could lead to a quick shift on hiking bets. This week’s CPI and PPI data will be especially important, but don’t forget the Fed’s favorite, Core PCE, at the end of the month. 

Industry positioning remains mixed. Data collected last week showed just that, as hedge funds reached peak bearishness on Treasurys while asset managers were just the opposite. While leveraged funds increased net-short positions of 5-year note futures to an all-time high, asset managers increased their net-bullish positions. So, what does this tell us? The combination of a hawkish Fed, restrictive policy and a tenuous inflation outlook continues to create significant uncertainty for the broader market.