Recession Fears Take Hold

2s10s spread inverts as Treasurys rally once again. Swap rates and Treasury yields declined 2-8 bps across a flattening curve, the 10-year Treasury yield closing a shade above 2.80% as markets continued to fret over the many headwinds facing the economy.  The closely watched 2s10s spread inverted once again, falling to -2bps. TIPS breakevens also continued to plummet, 10-year rates falling below 2.30% for the first time since mid-2021 as the market prices in a rapid normalization of inflation.

Fed funds futures pricing in rate cuts by January 2023. The recent price action has taken a full 50bps of rate hikes out of the curve this year and is pricing in cuts to the Fed’s policy rate by early 2023. Whereas the market and the FOMC were generally in sync as of the Fed’s last meeting in mid-June, a significant spread has opened up between the FOMC’s “Dot Plot” and the swap curve:

Day ahead. Tomorrow will be all about the release of the FOMC’s meeting minutes. While the Fed has been transparent in its commitment to control inflation, the market might need a reminder after the ~45bp decline seen in swap rates over the past week.