Reply To: Bond Traders Weekly Outlook: Key 2s10s Treasury Spread Compressed 50% In Second Quarter


Treasuries have not responded well to this morning’s data.

The 2-yr note yield is up 15 basis points to 4.87%, hurt by the specter of the Fed staying on a tightening path, and the 10-yr note yield is up 13 basis points to 3.84%, sensing that the effort to get inflation back down to 2.0% is going to be a difficult one. Yesterday, Fed Chair Powell said he doesn’t think core inflation will be back to 2.0% until 2025.

The third estimate for Q1 GDP saw a strikingly large, upward revision to 2.0% from 1.3% (consensus 1.3%), as consumer spending proved to be stronger than thought, while the GDP Deflator was revised down to 4.1% from 4.2% ( consensus 4.2%). Granted this is a backward-looking report, yet the key takeaway is that it underscores how the strength of the labor market fueled consumer spending in the first quarter and helped forestall any recession-like trajectory in the U.S. economy.

Initial jobless claims for the week ending June 24 decreased by 26,000 to 239,000 (consensus 266,000) while continuing jobless claims for the week ending June 17 decreased by 19,000 to 1.742 million. In the recessions seen since 1980, initial jobless claims have averaged north of 375,000, so the key takeaway from today’s report is that the labor market continues to be resilient, which is a good portent for the economy.

The CME FedWatch Tool shows an 89.3% probability of a 25-basis points rate hike to 5.25-5.50% at the July FOMC meeting, versus 81.8% yesterday. Notably, though, there has been an uptick in expectations for another rate hike at the September FOMC meeting. It is still not the expected outcome, yet the probability of a second rate hike has risen to 25.0% from 16.4%.