Bond Traders Weekly Outlook: Two Year Note Compresses 2s10s Spread Further

U.S. Treasuries ended the week mixed with the sixth consecutive loss for the 5-yr note through to longer tenors. Treasury yields moving lower in response to debt ceiling and regional bank worries. This week’s fall was paced by shorter tenors keeping the yield curve under pressure, compressing the 2s10s spread by six basis points for the second consecutive week, to -58 bps. The US 2-year yield rose 29 basis points on the week trading at 4.27%. The high yield reached 4.349% the highest level since March 15, 2023.

The debt ceiling news overshadowed Fed Chairman Powell’s appearance at a panel discussion in Washington, during which he said that inflation is “far above” the Fed’s objective, balancing that with rates may not have to rise as much because of credit conditions.

Hungry Bond Traders

There is a firm belief the Central Banks are blindly raising rates because ‘they have to’ and the consequences will be dire, furthermore that the US Administration is bumbling along with damaging decisions one after the other.

Understandably, aware of past Fed behavior markets are conditioned for loose conditions. They expect Fed loosening measures to reverse any meaningful tightening, hence constant flipping between end of inflation and hawkish Fed speaks trades.

Weekly Recap

The 2-yr note yield settled the session unchanged at 4.27%, rising 29 basis points this week. The 10-yr note yield rose four basis points today, and 23 this week, to 3.69%. The U.S. Dollar Index rose 0.5% this week to 103.18. The 2s10s spread compressed by six basis points for the second consecutive week, to -58 bps.

On Friday early optimism on debt ceiling negotiations faded and Treasury Secretary Yellen reportedly telling bank CEOs that more mergers may be needed. The debt ceiling news overshadowed Fed Chairman Powell’s appearance at a panel discussion in Washington, during which he said that inflation is “far above” the Fed’s objective, balancing that with rates may not have to rise as much because of credit conditions.

Treasuries saw knee-jerk buying in response to the debt ceiling and regional bank headlines. The 2-yr note yield, at 4.35% before the news broke, plunged to 4.19% before settling the day unchanged at 4.27%. The 10-yr note yield, at 3.71% earlier, fell to 3.64% but settled up four basis points to 3.69%.

The U.S. Treasuries auctioned a $15 bln 20-yr bonds, which met solid demand, however the post-auction bid quickly gave way to a slip to fresh lows into the close. The sale followed last weeks’ strong 3-, 10- and 30-year auctions. Today’s sale drew a high yield of 3.954%, which stopped through the when-issued yield by a basis point. The bid-to-cover ratio (2.56x vs 2.59x) and indirect takedown (70.6% vs 71.4%) were a bit below the 12-month averages.

Crude oil ended little changed, gaining $1.70, or 2.4%, for the week, while the U.S. Dollar Index fell 0.4% to 103.18, narrowing this week’s gain to 0.5%.

Bond auctions last week:

$15 billion 20-yr bond sale, which met solid demand, however the post-auction bid quickly gave way to a slip to fresh lows into the close. The desk gave an C-rating on the auction. 

Money Market Flows

  • Investment-grade bond funds posted inflows of $2.163 billion, while junk bond funds reported outflows of $1.151 billion (from Lipper).
  • Total money market fund assets gained another $13.6bn to a record $5.341 TN, with a ten-week gain of $448bn. Total money funds were up $856bn, or 19.1%, y-o-y.
  • Total Commercial Paper declined $6.8bn to $1.140 TN. CP was up $18bn, or 1.6%, over the past year.

Yield Watch


  • 2-yr: UNCH at 4.27% (+29 bps for the week)
  • 3-yr: +2 bps to 3.96% (+29 bps for the week)
  • 5-yr: +5 bps to 3.75% (+30 bps for the week)
  • 10-yr: +4 bps to 3.69% (+23 bps for the week)
  • 30-yr: +5 bps to 3.95% (+17 bps for the week)

U.S. Treasuries finished April with solid gains across the curve following the release of the Bank of Japan’s first policy statement under Kazuo Ueda. The BoJ made no changes to its ultra-loose policy, but it replaced a pledge to keep rates at or below current levels with guidance for continued yield curve control with an aim of achieving the price stability target.

Key Rates and Spreads


  • 10-year Treasury bonds 3.70%, up +0.27% w/w (1-yr range: 2.60-4.25) (12 year high)
  • Credit spread 2.15%, down -0.06 w/w (1-yr range: 1.76-2.42)
  • BAA corporate bond index 5.85%, up +0.21 w/w (1-yr range: 5.00-6.59) (10 year+ high)
  • 30-Year conventional mortgage rate 6.82%, up +0.27% w/w (1-yr range: 5.05-7.38) (new 20 year high)

Yield Curve

  • 10-year minus 2-year: -0.60%, down -0.07% w/w (1-yr range: -0.86 – 1.59) (new 40 year low)
  • 10-year minus 3-month: -1.59%, up +0.17% w/w (1-yr range: -1.17 – 2.04) (new low)
  • 2-year minus Fed funds: -0.78%, up +0.31% w/w
10-Year Treasury Constant Maturity Minus 2-Year Treasury Constant Maturity (T10Y2Y)

Two Year Treasury Volatility was Historic in the First Quarter of 2023

  • Two-year Treasury yields began 2023 at 4.43% then fell to 4.10% by February 2nd.
  • Yields then surged almost 100 bps to trade to 5.07% on March 8th. Volatility was on steroids.
  • Yields were down to 3.71% intraday on the 15th, only to rally back to 4.25% on the 17th.
  • They sank to a low of 3.63% on the 20th, back up to 4.25% on the 22nd,
  • Then down to 3.55% on the 24th
  • Ended the quarter at 4.03%.
  • The yield on the 2-year Treasury fell to 4.06%, down 3.7 basis points on Friday and posting the biggest monthly drop since January 2008, in March the yield fell 73.5 basis points. Its first quarterly retreat in eight quarters.
  • The yield on the 10-year Treasury was at 3.491%, off 5.9 basis points, and recording its sharpest monthly fall since March 2020.
  • The yield on the 30-year Treasury declined to 3.688%, down 5.7 basis points, while setting its biggest monthly decline since January.

US corporate bond spreads over US Treasuries and how they have widened as cyclical risk have risen but are well shy of the wide spreads recorded during the early part of the pandemic, let alone the GFC. To label this as a severe credit crunch would be extreme.

10 Year Note Technical Analysis via KnovaWave

Highlights – Federal Reserve

  • Federal Reserve Credit declined $12.4bn last week to $8.448 TN.
  • Fed Credit was down $452bn from the June 22nd peak.
  • Over the past 192 weeks, Fed Credit expanded $4.722 TN, or 127%.
  • Fed Credit inflated $5.637 TN, or 201%, over the past 549 weeks.
  • Fed holdings for foreign owners of Treasury, Agency Debt increased $8.0bn last week to a near eight-month high $3.390 TN.
  • “Custody holdings” were down $33.2bn, or 1.0%, y-o-y.

End-of-week market pricing were pricing a couple rate cuts between June and December. Market expectations for the Fed funds rate at the December 13th FOMC meeting jumped 25 bps this week to 4.64%. It was as high as 4.73% in early-Friday trading, before “Powell Steers Policy Debate With Clear Signal on June Rate Pause.” Hawkish Fed officials had the market pricing an almost 40% probability for a 25 bps June rate increase, before dovish Powell comments pushed the odds down to 18% by Friday’s close. It will be a divided committee for the June 14th meeting.

Jay Powell’s press conference was ‘uncontroversial’. We did see some contrition from him “We are committed to learning the right lessons from this episode and will work to prevent events like these from happening again.”

A bit late given we have seen indefensible mistakes made in pathetic bank regulation. We had inflation mismanagement that is at risk of historic failure. Banking instability adds to downside economic risks, containing inflation leant the bank, at tleast in this meeting to err on the side of overing crushing the economy. Powell repeatedly reminds the risk of repeating past mistakes, where Fed inflation fights ended prematurely.

The FOMC meeting came in the midst of chaos. There was a strong case for the Fed to put off another rate increase. The unfolding banking crisis ensures tighter credit for an economy already downshifting. The case for hiking rates was equally compelling. Inflation remains elevated, with recent data consistently pointing to sticky price pressures. Friday’s strong payroll data, including NFP 253,000 jobs added and a 0.5% (4.4% y-o-y) gain in Average Hourly Earnings confirmed unrelenting labor market tightness.

Bloomberg’s Mike McKee: “Markets have priced in rate cuts by the end of the year. Do you rule that out?”

Chair Powell: “We on the Committee have a view that inflation is going to come down, not so quickly, but it’ll take some time. And in that world, if that forecast is broadly right, it would not be appropriate to cut rates, and we won’t cut rates. If you have a different forecast – markets have been from time-to-time pricing in quite rapid reductions in inflation – we’d factor that in. But that’s not our forecast. And, of course, the history of the last two years has been very much that inflation moves down [gradually]. Particularly now, if you look at non-housing services, it really, really hasn’t moved much. And it’s quite stable. So, we think we’ll have to – demand will have to weaken a little bit and labor market conditions may have to soften a bit more to begin to see progress there. And, again, in that world, it wouldn’t be appropriate for us to cut rates.”

Highlights – Mortgage Market

  • Freddie Mac 30-year fixed mortgage rates rose eight bps to 6.51% (up 126bps y-o-y).
  • Fifteen-year rates gained five bps to 5.80% (up 137bps).
  • Five-year hybrid ARM rates surged 26 bps to 5.99% (up 191bps).
  • Bankrate’s survey of jumbo mortgage borrowing costs had 30-year fixed rates up 14 bps to 7.01% (up 164bps).
Mortgage News Daily February 17, 2023

Global Bond Watch

“Government bond prices around the world are moving in tandem, reducing investors’ ability to diversify their portfolios and raising concerns of being blindsided by market gyrations. Correlations between currency-adjusted returns on the government debt of countries such as the U.S., Japan, the U.K. and Germany are at their highest level in at least seven years, data from MSCI showed, as central banks around the world ramp up their fight against inflation.”

October 10 – Reuters (Davide Barbuscia)

Major Benchmark 10-year Bond markets

Bond Market Performance 2023

Major 10-year Bonds/Notes

Highlights – European Bonds

  • Greek 10-year yields were unchanged at 4.00% (down 57bps y-t-d).
  • Italian yields gained nine bps to 4.27% (down 43bps).
  • Spain’s 10-year yields jumped 12 bps to 3.48% (down 4bps).
  • German bund yields rose 15 bps to 2.43% (down 2bps).
  • French yields jumped 15 bps to 3.00% (up 2bps).
  • The French to German 10-year bond spread was little changed at 57 bps.
  • U.K. 10-year gilt yields surged 22 bps to 4.00% (up 32bps).

This all happened quickly…. just months ago we had:

Highlights – Asian Bonds

  • Japanese 10-year “JGB” yields added a basis point to 0.40% (down 2bps y-t-d).

“The unprecedented monetary easing by the Bank of Japan over the past decade has reshaped the nation’s lenders, from their asset holdings to loan income. That may be about to change as the central bank prepares to take on a new chief next month… The most notable case is Japan Post Bank Co., a unit of a former state-run mail services giant, which manages most of almost $2 trillion of assets in its securities portfolio. Where it once invested as much as 80% of its money in JGBs, this now accounts for less than 20%. Instead, the bank has rapidly built up its holdings of foreign bonds and other securities to 78 trillion yen ($572bn), accounting for about 35% of its entire portfolio.”

March 5 – Bloomberg (Taiga Uranaka)

Key US Bond Auction Highlights

Inflation Matters

Inflation with Henry Kaufman

Kaufman is the legendary chief economist and head of bond market research at Salomon Brothers is someone who knows Inflation.  Henry Kaufman in an interview with Bloomberg’s Erik Schatzker Jan 14, 2022:

 “I don’t think this Federal Reserve and this leadership has the stamina to act decisively. They’ll act incrementally. In order to turn the market around to a more non-inflationary attitude, you have to shock the market. You can’t raise interest rates bit-by-bit.”

“The longer the Fed takes to tackle a high rate of inflation, the more inflationary psychology is embedded in the private sector — and the more it will have to shock the system.”

“‘It’s dangerous to use the word transitory,’ Kaufman said. ‘The minute you say transitory, it means you’re willing to tolerate some inflation.’ That, he said, undermines the Fed’s role of maintaining economic and financial stability to achieve ‘reasonable non-inflationary growth.’”

Inflation, Disinflation

The rubber is meeting the road as the trifecta of rising interest rates, the Russian invasion of Ukraine and surging costs continues to weigh, this has been no surprise to us here and shouldn’t have been to the market and PTB. You can only play with fire for so long before you get scorched!

With all the redirection of blame at the Fed about inflation one has to understand it is a global phenomenon outside the Fed’s Control. With the war drums louder than ever the supply chain issues are out of control. The Federal Reserve is not in control of global energy and commodities prices.

Everything points to powerful inflationary dynamics and a Federal Reserve so far “behind the curve.”

Instability is pronounced, credit defaults are on track to rise in North America, Europe, Asia, and Australia, according to a survey by the International Association of Credit Portfolio Managers. The economic slump is likely to occur later this year or in 2023, according to the survey.

Global Bonds 2022 Performance

10 Year Bonds – Americas 2022 Performance

10 Year Bonds – Europe 2022 Performance

10 Year Bonds – Asia 2022 Performance

10 Year Bonds – Africa 2022 Performance

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Sources: Scotia Bank, TC

Note these charts, opinions, news, estimates and times are subject to change and for indication only. Trade and invest at your own risk.

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