Treasury Tuesday's

Following the first edition of No Rest for FX, I had a couple of requests for similar commentaries in the Fixed Income space. In order to not rush the Treasuries view though, I decided it was worthy of its own periodical which I'm calling Treasury Tuesday's (imaginative I know). This will be published every other week but there will be a brief paragraph added to upcoming editions of No Rest for FX on the 10y Treasury yield. 

Where are we now? 

Source: Bloomberg 

What's the View? 

So the 2y yield has moved higher again and sits above 0.5% once more. To me, this still seems a bit off and I think the market is pricing in two many (pun intended) hikes for 2022. I wouldn't be surprised at all to see this come back down to around the 40bps region. Remember, price up yield down, so to take advantage of this view you'd get long 2y Treasuries. 

What I particularly like with the 2y view is that the 5y supports the claim that there will not be many hikes in this cycle. With the 5y Treasury at just 1.26%, we are basically saying the Fed hikes a couple of times and then says "nope we're done". If this is the case then I think we have to question whether the Fed will bother hiking at all in the next two year period. 

Sure, inflation is high, but it's likely transitory - particularly when commods start behaving properly. 

Then we have the 10y Treasury. I've been preaching for a while that this should be higher. We have some higher inflation levels and while I believe this is transitory, I do not expect a return to the below 2%s, so a slightly higher path for Fed Funds rates over the longer term seems possible to me. 

Source: Refinitiv - 10y Treasury yield. 

One thing we really need to be careful of though is expecting the 10y to go too far. Let's have a look at the most convincing downtrend in financial markets. 

Source: Bloomberg (From Authers' email this morning) 

The trend is your friend. I'd be happy to look for an increase in the 10y to around 2%, but beyond that... this is a difficult trend to question. On the other hand, if the 10y got a clear breakout then we're off to the races. Anyway, we're a long way from that, so for the time being, I expect the 10y Treasury to rise. 

The 30y: 

Dead on at 2%, I'm quite happy since this is the pace of longer-run growth. If you forced me to take a view, maybe a rise to 2.2% in the near-term is possible commensurate with higher 10s, but I really doubt the market is uncomfortable with 2% so I'd be surprised to see it happen quickly. 

WHAT WILL CHANGE THINGS? 

Probably the most important element of this piece. IF POWELL IS NOT RENOMINATED... Then this means we get Lael Brained. Almost certainly this would cause the 2y yield to tank since she is ultra-dovish and very much more committed to the employment objectives of the Fed. 

INFLATION TRANSITORY: If we start to see hotter inflation coming from more parts of the market, this is a big concern - especially if it starts to be priced in inflation expectations. If this happens and the Fed gets hawkish, the 2y will move fast and the 5y will reprice higher too. 10s and 30s probably not so much, so we'd get flattening as more hikes are priced in now. 

That's all for the first edition, please do get in touch with any questions.