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Late Bond Sell-Off, 2s10s Off 40 Year Lows - For Now

US TSYS
Tsy 30YY hit session high of 3.7459% as selling in futures accelerated in late trade, no obvious headline print or recent block trade to trigger move - though bonds remained soft after $21B 30Y auction tailed 3.1bp (3.686% high yield vs. 3.655% WI) soured interest in long end. Potential factors driving sell-off:
    • Early selling ahead next week's corporate supply (Tsys see $15B 20Y Bond and $9B 30Y TIPS).
    • Technical selling as TYH3 nears support of 112-29 76.4% retracement of the Dec 30 - Jan 19 bull run.
    • Curve unwinds following second day of large late 10s/ultra-bond steepeners fading the broader move in curves to multi-decade lows (2s10s currently -82.234 vs. -87.193, a level not seen since 1981.
  • Protracted periods of inverted yld curve signaling market expectations of coming recession in the near term. Tsy 2s10s curve spent much of the period between late 1978 through mid 1982 inverted territory, a precursor to recession that ended in late 1982. Yield curve inversion saw wide variance in 1980 after spd fell to -241.65 low in March 1980 and skyrocketed to 130.0 by early July before re-inverting again.
  • Meanwhile, short end outperforms mid-late 2023 futures as markets price in continued rate hikes: Fed funds implied hike for Mar'23 at 26.1bp (+0.7), May'23 cumulative 45.4bp (+1.8) to 5.036%, Jun'23 55.2bp (+2.9) to 5.134%, terminal at 5.155% in Jul'23/Aug'23.
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