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What a Difference a Day Makes

Swap rates and Treasury yields take comfort in Powell testimony, rebound 15+ basis points. The Fed Chair’s soothing words helped risk assets and rates rebound on the day, Powell telling Congress the central bank will proceed “carefully” and that he is in favor of a 25bp hike in two weeks’ time. Taking stock after a roller coaster of a week, 10-year Treasury yields now sit at 1.87% and 5-year rates sit at 1.59% – both approximately 15bps removed from their YTD highs.

2-year / 10-year spread reaches flattest level since 2020. While rates have rebounded dramatically from yesterday’s session, the swap curve remains dramatically flat beyond the 2-year mark. The 2s10s spread, a closely watched measure of curve steepness, declined below 32 basis points for the first time since 2020. When the 2s10s spread inverts, it has a near perfect record of predicting recession within 18 months:

Day ahead. Initial jobless claims will kick things off, followed closely by Markit’s indicators of service sector activity. Durable goods orders for the month of January will also be released. Russia’s invasion of Ukraine will undoubtedly remain the market’s focus as investors closely watch the conflict for signs of escalation (and possible financial contagion).

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