BMO Weigh In On Recent Moves

BMO note that “Tuesday’s price action was in line with the higher rates thesis that we brought into the new year; while we see 2-handle 10s as very achievable during Q1, the severity of the initial selloff risks stalling out at the current pace. Stochastics are now decidedly into oversold territory for all the benchmarks - even in 2s. This speaks to the potential for a period of consolidation to work off the extremes of the price action as opposed to reversal per se. This is more than a nuance; particularly as the move thus far in 2022 has carried the tone of a sustainable repricing as opposed to a simple in-range selloff. Moreover, the Q1 2021 pattern of a series of distinct bearish episodes followed by consolidations led to the step-up character of the last aggressive attempt to establish a higher yield plateau. We’re onboard with the march higher in US rates; with a nod to the fact that we’re risking a give-back in the event rates falter on the path of 10s to 1.704% before challenging 1.77%.”

• “The 5-Year sector has been notable in the extremes reached in terms of outright yield levels. At 1.395% this morning, the belly was at levels not seen since January 2020. For context, during Q419 5s ranged between 1.32% and 1.78%. Admittedly, the Fed was actively cutting rates during this period after having overshot terminal during the last cycle. Nonetheless, without a single hike yet to be realized in the current normalization campaign, the approach to 1.40% is an accomplishment to be sure. The OIS curve shows 5-Year/5-Year forward at 1.69% - a meaningful distance from the Fed’s 2.5% terminal assumption/guidance and a level seen as recently as Thanksgiving. This speaks to the potential for further upside pressure on 5-Year yields as investors debate this particular cycle’s terminal funds rate - an issue that will become ever more topical as the first hike approaches."