Bond Traders Weekly Outlook: US Treasury Curve Sees 2 Year Note Outperform

U.S. Treasury yields moved along the curve which tightened the 2s10s spread by another basis point to -77 bps. Longer-dated Treasuries ended the week on a firmly lower note while the 2-yr note outperformed, logging a modest gain. A dovish Philadelphia Fed President Harker (FOMC voter) said that the fed funds rate range should be above 5.00%. He added the Fed is not likely to cut this year but may be able to in 2024 if inflation starts ebbing.

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.

Weekly Recap

Longer-dated Treasuries ended the week on a firmly lower note while the 2-yr note outperformed, logging a modest gain. Philadelphia Fed President Harker (FOMC voter) said that the fed funds rate range should be above 5.00%. This week’s action tightened the 2s10s spread by another basis point to -77 bps.

Benchmark MBS yields surged 42 bps this week, reversing notable early 2023 MBS outperformance (yields having dropped 50 bps over the previous five weeks). Short squeeze dynamics and the unwind of hedges tend to have exaggerated impact on mortgage securities. After yields were squeezed 62 bps lower over five weeks, UK gilt yields abruptly reversed 34 bps higher this week. With that went stocks, the equities short squeeze also reversed sharply this week. The Goldman Sachs Short Index sank 9.7%, reducing y-t-d gains to 15%.


Disinflation was the new buzz word from the latest FOMC from Powell. Though of course that caused some trembles in the bond market Friday after the outlier jobs beat. Its a difficult one with the basis changes, seasonality and strikes how accurate that beat was. I can we won’t know until next month.

I will say that it is gratifying to see the disinflationary process now getting underway, and we continue to get strong labor market data.” “So, I would say it is a good thing that the disinflation that we have seen so far has not come at the expense of a weaker labor market. But I would also say that that disinflationary process that you now see underway is really at an early stage.”

Chair Powell FOMC Feb 2023

Yield Watch

  • 2-yr: -1 bp to 4.51% (+22 bps for the week)
  • 3-yr: +2 bps to 4.20% (+23 bps for the week)
  • 5-yr: +4 bps to 3.92% (+25 bps for the week)
  • 10-yr: +6 bps to 3.74% (+21 bps for the week)
  • 30-yr: +8 bps to 3.83% (+20 bps for the week)
  • Investment-grade bond funds posted inflows of $2.842 billion, and junk bond funds reported positive flows of $871 million (from Lipper).
  • Total money market fund assets declined $16.4bn to $4.805 TN. Total money funds were up $212bn, or 4.6%, y-o-y.
  • Total Commercial Paper dropped $29.5bn to $1.261 TN. CP was up $242bn, or 23.7%, over the past year.

Key Rates and Spreads


  • 10-year Treasury bonds 3.63%, up +0.11 w/w (1-yr range: 1.66-4.25) (12 year high)
  • Credit spread 1.88%, up +.20 w/w (1-yr range:1.76-2.42)
  • BAA corporate bond index 5.51%, up +0.31 w/w (1-yr range: 3.59-6.59) (10 year+ high)
  • 30-Year conventional mortgage rate 6.50%, up +0.31% w/w (1-yr range: 3.67-7.38) (new 20 year high)

Yield Curve

  • 10-year minus 2-year: -0.82%, down -0.05% w/w (1-yr range: -0.85 – 1.59) (new 40 year low)
  • 10-year minus 3-month: -1.09%, down -0.05% w/w (1-yr range: -1.17 – 2.04) (new low)
  • 2-year minus Fed funds: -0.13%, up +0.16% w/w
10-Year Treasury Constant Maturity Minus 2-Year Treasury Constant Maturity (T10Y2Y)

10 Year Note Technical Analysis via KnovaWave

Long Bond Yield

Highlights – Federal Reserve

  • Federal Reserve Credit declined $25.9bn last week to $8.398 TN.
  • Fed Credit was down $503bn from the June 22nd peak.
  • Over the past 178 weeks, Fed Credit expanded $4.671 TN, or 125%.
  • Fed Credit inflated $5.587 Trillion, or 199%, over the past 535 weeks.
  • Fed holdings for foreign owners of Treasury, Agency Debt last week rose $7.0bn to $3.332 TN.
  • “Custody holdings” were down $134bn, or 3.9%, y-o-y.

Rate markets now have peak Fed funds at 5.19% for the July 26th FOMC meeting, compared to the previous week’s 5.03% at the June 14th meeting.

Highlights – Mortgage Market

  • Freddie Mac 30-year fixed mortgage rates jumped 17 bps to a four-week high 6.16% (up 247bps y-o-y).
  • Fifteen-year rates surged 23 bps to 5.41% (up 248bps).
  • Five-year hybrid ARM rates increased five bps to 5.47% (up 267bps).
  • Bankrate’s survey of jumbo mortgage borrowing costs had 30-year fixed rates up 27 bps to a six-week high 6.59% (up 260bps).
Mortgage News Daily November 4, 2022

Key Bond Auctions

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

Ten-year government yields down significantly to start the year.

  • Greek 10-year yields rose 19 bps to 4.19% (down 38bps y-o-y).
  • Italian yields gained 18 bps to 4.21% (down 49bps).
  • Spain’s 10-year yields jumped 20 bps to 3.31% (down 20bps).
  • German bund yields gained 17 bps to 2.36% (down 8bps).
  • French yields jumped 19 bps to 2.83% (down 15bps).
  • The French to German 10-year bond spread widened two to 47 bps.
  • U.K. 10-year gilt yields surged 34 bps to 3.40% (down 28bps).

Where we got to in 2022:

Highlights – Asian Bonds

  • Japanese 10-year “JGB” yields added a basis point to 0.50% (up 8bps y-t-d). 

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.’”

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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