The US is selling its 2-year yields this week and there are fears that the Treasury will pay 5%.
Right now, Runaway 2s are trading at 4.96% and sales haven’t exactly been going great lately, especially with the massive auction sizes.
This is what the graph looks like on 2:
US 2s per day
I want to point out a few things:
- Two-year yields are the most liquid expression of the change in rates expected by investors over this period. There is a slight term premium, but you’re basically comparing revolving bills to rate lock. When we were down at 4.2%, the market anticipated substantial rate cuts, this is no longer the case.
- What happened the last time the 2s were above 2%? It didn’t take long for the Fed and Treasury to start panicking. Treasury reduced auction size and duration while the Fed pivoted. I don’t think it’s a coincidence.
Most people have been wrong about inflation this year in the United States, as it has remained stubbornly high for three months and commodities are now pressing. That said, inflation is falling elsewhere, which makes me think it’s more specific to the US than globally. This is due in part to the United States’ huge budget deficits, 30-year fixed-rate mortgages, and the excellence of American businesses – particularly those of multinational technology companies.
However, this is also due to strange factors, like high car insurance and health insurance rates, which are unlikely to persist. This is notably due to rent inflation and the way in which the owner’s equivalent rent is calculated. Given this, consider this graph of Matthew Boesler:
Rents have stabilized, but it just hasn’t shown up in the CPI yet. Perhaps this week we will get some divergence with PCE, which is the Fed’s preferred inflation measure. If so, the market could quickly turn to rate cuts, which would weigh on the U.S. dollar and boost risk assets.
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