Are Yields Headed to the October Highs?

Are Yields Headed to the October Highs?

• Treasury yields continue to push higher in early trading setting new YTD highs across the curve and now seeming to have eyes on the October yield highs. The combination of a hot January jobs and CPI report, a rebound in retail sales, and a PPI report that also displayed some heat has made it tough for bond bulls this week. Currently, the 10yr is yielding 3.89% and the 2yr at 4.67%. As a reminder, the October highs are 4.24% for 10s and 4.72% for 2s.

• As mentioned, the recent spate of hotter-than-expected reports, and the usual dose of hawkish Fed speak, has pushed yields higher. St. Louis Fed President James Bullard was on the tape yesterday saying that he favored a 50bps hike at the last meeting and wouldn’t rule out a 50bps hike for the March meeting with a 5.375% rate (5.25% – 5.50%) as the expected terminal rate for now.

• Bullard has been one of the more hawkish Fed members, if not the most hawkish, during this cycle, but that has tended to be the right call, thus, the market’s current deference to his comments.

• The deciding factor in the 25bps vs. 50bps hiking debate will come down to the February jobs and CPI reports. If they match the strength in January a 50bps hike will be on the table. We surmise that Powell would like to refrain from that and keep the cadence at 25bps, lest the downshift in February look in hindsight like a mistake.

• In that regard, this recent back-up in yields should play into Powell’s hand as it re-tightens financial conditions and could slow the recent awakening of the housing market when 30yr mortgage rates dipped into the 6.30% range in January and early February from 7.35% back in November. Currently, the 30yr mortgage rate is 6.79% and due to head higher given the recent Treasury action.

• The thinking here is the more the market can apply financial tightening the less the Fed may feel compelled to do, and perhaps remain at the 25bps cadence. Of course, those smaller hikes seem destined to continue into May and June, unless we see markedly softer prints in the February data.

• What’s interesting too this week is how quickly the market has shifted to the Fed’s view on upcoming rate hikes. They have fully matched the Fed’s latest forecast and have even incorporated some of the subsequent hawkish rhetoric as well with a 5.30% terminal rate expected. The market, however, is not yet fully embracing the higher-for-longer theme as they continue to see one 25bps rate cut by year-end. Again, if incoming data continues hot, expect that assumption to be ditched as well.

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  Agency Indications — FNMA / FHLMC Callable Rates

  Maturity (yrs)	2 Year	3 Year	4 Year	5 Year	10 Year	15 Year
  0.25	5.45	5.21	5.15	5.13	5.16	5.62
  0.50	5.43	5.18	5.09	5.02	5.02	5.51
  1.00	5.43	5.15	5.05	4.98	4.93	5.38
  2.00	–	5.14	5.00	4.90	4.81	NA
  3.00	–	–	–	4.85	4.75	NA
  4.00	–	–	–	–	4.70	NA
  5.00	–	–	–	–	4.66	NA
  10.00	–	–	–	–	–	NA