Invert the front, steepen the back
October 18, 2022
–The 2yr yield fell 5 bps yesterday to 4.45%, completely reversing Friday’s gain. The ten-yr yield rose 0.6 bp to 4.008. Red eurodollars were the leader on the curve, rising 6 bps in price, while golds, the fifth year out, were only +0.75.
–A couple of interesting notes about spreads on either side of the yield curve spectrum: EDM3/EDM4 settled -80.5, a new recent low (9485.5/9566.0). This is the most inverted one-yr calendar on the curve, and it edged to a new recent low, settling -1.5 on the day. The lowest any one-yr calendar has settled in this cycle is -84 in mid-July, which was lower than any 1-yr spread seen in the GFC (low settle was -46.5). So, the market is pricing the Fed pivot from middle of next year. At the other end, 10/30 treasury spread clawed barely above the water line of zero yesterday, with the thirty-yr ending at 4.012% (up 4 bps on the day). Post-FOMC this spread printed -19 bps. After CPI, the market is pricing certainty of 75 in November and high odds of another 75 in December, yet the curve is steepening from 2’s back. Yields at the long end are suspect here, given this price action.
