Steeper curve as hike prospects lessen
January 25, 2022
–An early plunge in stocks reversed like the end of the Bills Chiefs game with the indexes ending in the green in overtime. The possibility of stock market weakness made some realize that perhaps their aggressive rate hike calls have been over-zealous, and the short end modestly re-priced near term hiking prospects. For example, on Thursday EDZ2 settled at 9865, but it was 9877.5 at yesterday’s settle. EDH2/EDH3 one-yr calendar made a high of 110 bps on Thursday, but closed 96.5 yesterday, an over/under on 4 hikes. FFF2/FFF3 settled down 5 at 92.75.
–As the odds of hiking decreased, the curve steepened. On the dollar curve: reds (2nd yr) +8.875, greens (3rd) +7.25, blues (4th) +4.25 and golds (5th) +2.75. In treasuries, the two yr yield fell 3.8 while 30s were up 2.8. Even as stocks were plunging, TYH appeared capped at 128-18 and settled at 16+, with the cash yield at 1.74%, down a fraction of a bp. Long end is again under pressure this morning with USH2 155-01, down 28 even as stocks take another swan dive.
–I’ve found that when volatility jumps like this, short-term technical levels become much more important in terms of trade location. For example 126-26+ is the halfway retrace from last week’s low to yesterday’s high in TYH2, I would look to be a buyer there. Five-year auction today. FOMC tomorrow.
