UST MORNING CALL: 2/5 Curve ‘Could Get Flat or Invert’
(Bloomberg) -- “2s5s curve has now flattened so strongly that the only option left is to push hikes further into the future,” and “if Yellen’s testimony confirms that today (though we highly doubt that it will), we will likely see 2s rally versus the belly and the curve could steepen,” BMO strategist Aaron Kohli says in note.
- “If she sounds more hawkish, it could keep the probability of a hike on the horizon with the result that the curve could get flat or invert, either pressuring earnings or signaling another recession”
- “Price action still feels short and rates have some difficulty selling off in the absence of an external stimulus,” and “the market will be keenly watching Yellen’s testimony today for any such catalyst”
- Other observations from strategist morning notes:
- CRT (David Ader): “Yellen is going to get a lot of attention today in part because there’s not much else going on”
- “She will probably be dovish” as “various allusions in the most recent Statement raised subtle hints of concerns over financial market conditions, and we’ve heard from other Fed speakers since then that suggest they are not oblivious to impact of market and global economic turmoil on their forecasts”
- Marty Mitchell (independent): “The psyche of market participants has been severely damaged and that is leading to elevated volatility and to extreme moves across market sectors. This leaves everyone looking for what the next shoe will be to drop, and locked and loaded to unwind the next wave of risk when they find it”
- “We are hopeful that the early move higher in yield is telegraphing that yields will continue to correct higher as we move through Yellen’s round one testimony”
- 3Y auction was “bad,” and “with the bond market running higher right into it, it appears that many investors may have done their buying ahead of the auction”
- FTN (Jim Vogel): “Mounting distress this week did bring a large amount of 10-yr UST buying at 1.72% that will be money well spent by the risk-adverse if credit and equity continue their recovery,” and “rebound in stocks to 1885-1900 on the S&P 500 and a 10bp retracement in credit spreads will more than make up the bond declines for large domestic accounts”
Alert:
HALISTER1Source: BFW (Bloomberg First Word)
People Aaron Kohli (Bank of Montreal)
David Ader (CRT Capital Group LLC)
Jim Vogel (Ftn Financial)
Marty Mitchell (The Mitchell Market Report LLC)
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