This site uses cookies to provide you with a great user experience. By using BondbloX, you accept our use of cookies.
US front-end 2Y and 5Y Treasury yields shot up by 9-10bp after the US CPI report as the curve bear flattened (Term of the Day, explained below) and inverted further. US CPI came at 6.4% for January, above expectations of 6.2% and lower than last month’s 6.5% print. Core CPI came at 5.6%, above the surveyed 5.5% and lower than last month’s 5.7% print. The inflation print showed that while while inflation has slowed down, it is not happening at a fast pace and lends support to the Fed’s stance of on raising rates. The peak Fed funds rate jumped 6bp to 5.26% for the July 2023 meeting. With a 25bp hike in March being priced in, markets are expecting another 25bp in May with a 73% probability. US IG CDS spreads tightened by 0.3bp while HY spreads were 2.5bp wider. Equity indices were mixed with the S&P marginally lower while Nasdaq was up 0.6%.
European equity markets ended mixed. The European main CDS spread tightened 0.9bp while crossover CDS spreads tightened 0.7bp. Asian equity markets have opened with a negative bias today. Asia ex-Japan CDS spreads were 0.6bp tighter.
Bear flattening refers to a change in the yield curve where short-term rates move up faster than long-term rates, so that the two begin to converge. This phenomenon is widely regarded as a leading indicator for an economic contraction. Typically, short-term rates rise when the market anticipates the central bank to embark on a tight monetary policy, often with the aim of bringing inflation down.
On At least two more Fed rate hikes and no cut this year – Reuters poll
Oscar Munoz, U.S. macro strategist at TD Securities
“We currently expect two more hikes…But the risk is towards higher rates. The labor market remains strong and it’s going to take a bit more time for it to start showing signs of deterioration… That puts the risk of keeping services inflation and wage growth elevated for quite a bit and that’s going to filter back into inflation. That means the Fed is going to keep the policy rate at high levels for quite a bit longer”
On A Record Rally in Chinese Dollar Bonds Falters With Warning Signals Ahead
Zhi Wei Feng, senior analyst at Loomis Sayles
“The key is whether it’s a U-shaped or L-shaped recovery. But there is no certainty in that. No more default and some successful cases of debt restructuring progress are key to discerning whether the policies are effective enough to support a U-shaped recovery.”
On Fed officials keep door open to peak policy rate above 5.1%
New York Fed President John Williams
“With the strength in the labor market, clearly there are risks that inflation stays higher for longer than expected, or that we might need to raise rates higher”
Dallas Fed President Lorie Logan
“We must remain prepared to continue rate increases for a longer period than previously anticipated, if such a path is necessary to respond to changes in the economic outlook”
Richmond Fed President Thomas Barkin
“It’s (CPI) about as expected. Inflation is normalizing but it’s coming down slowly. I just think there’s gonna be a lot more inertia, a lot more persistence to inflation than maybe we’d all want”