Yield Curve Steepens as Market Digests Dual Threat Posed by Omicron Variant

Rates mixed as investors continue to digest variant risk. The yield curve steepened today as investors looked to balance the risk of the heavily mutated Omicron variant with speculation that the variant may be less virulent than previous strains of the coronavirus. Long-term Treasury yields and swap rates rose 2-3 basis points on the day while the short-end of the curve rallied- the 2-year Treasury yield falling to 0.48% – its lowest level in three weeks. The text of Fed Chair Jerome Powell’s Senate testimony was released ahead of tomorrow’s panel appearance. In his prepared comments, Chair Powell makes it clear that the Omicron variant presents a dual threat to the economic recovery- creating “downside risks” to growth but also adding “increased uncertainty” for inflation.

Dallas Fed manufacturing activity report for November shows continued expansion, prices hit record highs. The Dallas Fed’s activity report, which tracks manufacturing activity in Texas, decreased slightly from the prior month to 11.8, a number above 0.0 indicates more firms are seeing positive growth within the state. The report noted that prices for raw materials increased to a record high in November and wages neared record highs. Supply chain issues were called out as a primary driver for prices increases with only one in ten surveyed seeing supply chain normalization within the next three months.

U.S. existing pending home sales hit a 10-month high in October. The National Association of Realtors’ pending home sales index increased 7.5% month-over-month, well above economists’ expectations of 1.0%. Existing home sales are on pace to have its strongest year since 2006 as low mortgage rates and improving job growth have fueled consumer demand.