The US is selling 2-year yields this week and there are fears the Treasury could be paying 5%.
Right now, the on-the-run 2s are trading at 4.96% and sales haven’t exactly gone swimmingly lately, especially with the massive auction sizes.
Here is how the chart looks on 2s:
US 2s daily
I want to highlight a couple things:
- Two-year yields are the most-liquid expression of where investors think rates will be over that timeframe. There’s a slight term premium but you’re basically weighing rolling bills over against locking in rates. When we were down at 4.2% the market was pricing in substantial rate cuts, not anymore.
- What happened last time 2s rose above 2%? It didn’t take long for the Fed ans Treasury to both start freaking out. The Treasury cut auction sizes and lowered duration while the Fed pivoted. I don’t think that was a coincidence.
Most people got inflation wrong this year in the US as it’s been stubbornly high for three months and now commodities are pressing. That said, inflation is falling elsewhere which makes me think it’s more US-specific than global. That’s in part due to huge US fiscal deficits, 30-year fixed mortgages and US business excellence — particularly multinational tech.
However it’s also due to some strange factors like high auto and health insurance rates that shouldn’t be persistent. Most-notably it’s because of rent inflation and how owners’-equivalent rent is calculated. Given that, consider this chart from Matthew Boesler:
Rents have flattened out, it just hasn’t appeared in the CPI yet. Perhaps this week we get some divergence with PCE, which is the Fed’s preferred measure of inflation. If so, the market could quickly lean back towards rate cuts, weighing on the US dollar and boosting risk assets.