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The Rise and Collapse of Treasury Spreads With the Fed Doing Nothing the Whole Time

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34 comments on The Rise and Collapse of Treasury Spreads With the Fed Doing Nothing the Whole Time

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Various treasury spreads data from the New York Fed, calculations and chart by Mish

The chart shows the difference between pairs of US treasury notes and bonds. 

Treasury Spreads

  • 30 Year Minus 20 Year: -0.08 (Inverted)
  • 10 Year Minus 7 Year:  +0.02 
  • 10 Year Minus 5 Year: +0.12
  • 10 Year Minus 2 Year: +0.39
  • 5 Year Minus 3 Year: +0.09

Spreads generally peaked in the March-April period of 2021. The two-ten spread peaked at 1.59 percentage points on March 29, 2021.

Economists watch the 2-10 spread because it typically inverts before a recession. It’s quite possible we get no such signal this time.

How fast will the Fed hike?

Traders bet the Fed will get in 6 or this year down from 7 a couple weeks ago. I am sticking with no more than three. 

This post originated on MishTalk.Com.   

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Mike Shedlock

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34 Comments
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Oldest Most Voted
FromBrussels
FromBrussels
4 years ago
HEY…. fn US OF A , I love you, don t know why …but they just fn told me you fn  represent evwitin’ that is fn good on this fn earth……That fn true ? 
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Billy
Billy
4 years ago
The only thing that would be transitory would be deflation. Even if we did, it wouldn’t be widespread. We will not see 9 consecutive hikes like JPMorgan is suggesting and we will not have a recession anytime soon.
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Tony Bennett
Tony Bennett
4 years ago
Reply to  Billy
 “we will not have a recession anytime soon.”
…
Really?
GDPNow:
Latest estimate: 0.0 percent — March 1, 2022

The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2022 is 0.0 percent on March 1, down from 0.6 percent on February 25. After recent data releases from the US Census Bureau and the Institute for Supply Management, an increase in the nowcast in first-quarter real personal consumption expenditures growth from 1.6 percent to 2.3 percent was more than offset by a decline in the nowcast of the contribution of net exports to first-quarter real GDP growth from -0.10 percentage points to -0.94 percentage points.

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MPO45
MPO45
4 years ago
“Economists watch the 2-10 spread because it typically inverts before a
recession. It’s quite possible we get no such signal this time.”
If inversions herald recessions and there are no inversions then why is it necessary to call for a recession?   I’m not even clear what the purpose of calling recessions at this point is anyway because they seem to last a few months then stimulus, tax cuts, fed intervention or some other mechanism is thrown in to make it go away so what is the point of a recession or calling for one?
Target released earnings and had a stellar quarter, this on the heels of Walmarts stellar quarter.  Target warned about inflation so guess what I am worried about (hint: its not a recession).   If a recession is coming it doesn’t look like it.   If we do have a recession it may be because WWIII has started.
Target stock up 10% today in the middle of a war.  Gold has barely budged in the same war.
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Tony Bennett
Tony Bennett
4 years ago
Reply to  MPO45
“If a recession is coming it doesn’t look like it.”
…
Trust me. 
You’ll be the last to know.
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MPO45
MPO45
4 years ago
Reply to  Tony Bennett
I don’t care if I am the first or last to know, I make money in good or bad markets, the more volatility the better for options traders and the better bargains for long term investors.    There is always a way to make money in good or bad markets.   I don’t understand the sado-macho here for calling recessions every other post or comment.
At least there is the good economic post every now and then.
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Christoball
Christoball
4 years ago
Reply to  MPO45
I remember right before the Great Recession I could sell Ice Cubes to Eskimos. In my product category I sold the best of the best and also the mundane. People were buying everything in sight.
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FooFooFed
FooFooFed
4 years ago
The Bond market is telling us something, not after a fact, but before. Remember collapse of treasury spreads were happen long before the Russia Ukraine conflict. Its not the war collapsing spreads! EuroDollar futures curve also inverted out on the curve. Again, not the war. Global economy is not doing as well as mainstream thinks. And who cares about rate hikes, when they did hikes the last time in small increments it made zero difference with no effect. The Fed has zero control, other than psychology. At best it will just flatten curve even more. 
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Tony Bennett
Tony Bennett
4 years ago
Wheat and Corn futures  > +5% so far today.
Going to hit the wall doing Mach 1
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TexasTim65
TexasTim65
4 years ago
Reply to  Tony Bennett
Yup, the market suddenly realizing the Ukraine situation may not resolve for weeks or months and that spring planting may not happen. That’s 10% or of the World Wheat market and that doesn’t include Russia’s portion which is probably another 5-10%. So 15-20% less Wheat this year is going to mean a lot of hungry mouths.
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Doug78
Doug78
4 years ago
Reply to  TexasTim65
It’s springtime soon so farmers will be planting more because prices will be good. A lot depends on how much wheat is in silos. 
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MPO45
MPO45
4 years ago
Reply to  TexasTim65
Wheat & corn = bad carbs.   A lack of wheat may actually improve the health of many people that switch to fresh veggies if they are available.   I rarely eat bread anymore and I the only thing I eat made of corn occasionally are corn chips with salsa at a restaurant.
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Scooot
Scooot
4 years ago
I did think they’d only hike 3 times. I’ve changed my mind to a 1/4 at every meeting now for the foreseeable future. Supply disruptions and inflation are likely to continue for some time, and this will be more important to governments than falling markets, particularly as they have the cover of the war and the ongoing fallout. Unless of course it transcends into WW3 which is still far from certain at this time, in which case who knows? 
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Roadrunner12
Roadrunner12
4 years ago
Higher gas prices were on the way for this summer before the Ukraine invasion and now the question is how much more higher will they go now as a result?  And of course the resultant inflation of oil prices to come.  Meanwhile in Canada, Bank of Canada expected to start increasing rates tomorrow.
“For the past two years, Canadians have enjoyed access to cheap credit thanks to rock-bottom interest rates. However, to help curb soaring inflation, https://www.reuters.com/world/americas/bank-canada-march-interest-rate-hike-done-deal-say-economists-2022-02-24/ the Bank of Canada will begin hiking its benchmark interest rate — starting with a hike of 0.25 per cent on Wednesday.” 
  • Sanctions on Russian energy could send oil prices above $125 per barrel which would almost certainly stall economic growth and lead to rising unemployment.
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KidHorn
KidHorn
4 years ago
Reply to  Roadrunner12
That’s why oil and gas are exempt from sanctions. The US gets about 20% of it’s imported oil from Russia. The whole sanction thing is a joke. Meant more to give the impression of being tough than actually being tough.
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Roadrunner12
Roadrunner12
4 years ago
Reply to  KidHorn
“That’s why oil and gas are exempt from sanctions.”
Very confusing as to whats going on? Sanctions or no sanctions on Russian imports. Obviously sanctions are going to drive up oil prices and they were likely on the upswing before this all started.
I know Canada announced oil sanctions on Russian imports but we dont import any Russian oil anyway for what its worth. All for show?
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Rbm
Rbm
4 years ago
Reply to  Roadrunner12
Oil is a global market.  Even if its produced cheaper in us they still are gonna charge global prices or export it.  
That whole American energy independence is a crock so some politician can get elected or oil company can get something passed that favors them.    Remember during carter times when any us oil had to stay in country.  Then fracking for american energy independence a few yrs ago.   Shortly after oh we have a surplus.  Lets change the law to let us export.   Since the 70s i cant recall any time where energy companies stepped to the plate to up production to lower cost for us citizens.    Raised production to make more money yes.  Raised cost during election year to help republican candidates yes.   Raise production to cut suffering of average Americans no.   
My big ole butt.  
Ps wish i had bought some energy stock at beginning of lock down.  
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KidHorn
KidHorn
4 years ago
Reply to  Rbm
Not at the beginning. Oil prices went negative for a while. A month or so later would have been better.
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Rbm
Rbm
4 years ago
Reply to  KidHorn
True.  
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Roadrunner12
Roadrunner12
4 years ago
Reply to  KidHorn
“That’s why oil and gas are exempt from sanctions. The US gets about 20% of it’s imported oil from Russia. The whole sanction thing is a joke. Meant more to give the impression of being tough than actually being tough.”
That is an excellent point. The narrative the last few days has  been one of a unification of condemnation of the invasion and tough talk SWIFT, oil and gas, etc. But economically what will really change remains to be seen? A lot of tough talk but what actually comes of it. The world has a definite need for Russian energy and particularly Europe.
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KidHorn
KidHorn
4 years ago
Reply to  Roadrunner12
Even SWIFT is a bit of a joke. SWIFT is just a messaging system. Banks can do transactions without using it.
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Rbm
Rbm
4 years ago
Reply to  KidHorn
Or maybe just a stop gap till production from other places increases. Well see
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Roadrunner12
Roadrunner12
4 years ago
Reply to  Roadrunner12
Where and how does oil settle now with the Ukraine situation? Strategic Petroleum Reserve releases being discussed but are only a short term solution? As Ive stated the only region capable of growth in the US is the Permean. Elsewhere the fields are in mature and in decline. Where do we see demand destruction? $110, $120 etc. According to Devon CEO, its around $120.
“WASHINGTON, Feb 24 (Reuters) – President Joe Biden said on Thursday the United States is working with other countries on a combined release of additional oil from global strategic crude reserves, and a source with knowledge of the talks said the plan was in the “early stages.””
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RonJ
RonJ
4 years ago
Reply to  Roadrunner12
“Strategic Petroleum Reserve releases being discussed but are only a short term solution?”
The strategic reserve is only so big. It is supposed to be there in event of an actual emergency, not to manipulate the price of oil when it is high.
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Roadrunner12
Roadrunner12
4 years ago
Reply to  RonJ
Havent seen an official news release yet regarding SPR release but according to this tweet, the US will be releasing 30 million barrels. Yes, agreed, the SPR should only be used in the event of an actual emergency and not to manipulate the price of oil.
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Roadrunner12
Roadrunner12
4 years ago
Reply to  Roadrunner12
US 30 million barrel SPR release confirmed. Also wondering where the efforts to accelerate diversification of energy supplies away from Russia is gonna come from?
“After intensive around-the-clock coordination and consultation by President Biden, the Administration and our Allies and partners, the International Energy Agency (IEA) Member countries, supported by the European Commission, agreed to a collective release of an initial 60 million barrels of crude oil from our strategic petroleum reserves. As part of this agreement, President Biden will authorize the Department of Energy to release 30 million barrels from the U.S. Strategic Petroleum Reserve.
 
IEA Member countries also agreed to continue monitoring markets and consider further releases as necessary. We are prepared to use every tool available to us to limit disruption to global energy supply as a result of President Putin’s actions. We will also continue our efforts to accelerate diversification of energy supplies away from Russia and to secure the world from Moscow’s weaponization of oil and gas.”
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Tony Bennett
Tony Bennett
4 years ago
“The Rise and Collapse of Treasury Spreads With the Fed Doing Nothing the Whole Time”
…
Probably nothing … 
… but a LOT of “experts” are in for a rude awakening …
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MPO45
MPO45
4 years ago
Reply to  Tony Bennett
What exactly are the “experts” wrong about?   You rarely elaborate on anything, at least anything useful.  Is the economic apocalypse coming?  If so WHEN exactly?   If the stock market or real estate is going to crash, tell us when that will happen.    I think you are a bond bull so I get you want the world to burn so everyone will run to treasury bonds but what useful info can you contribute?
At least provide some useful commentary otherwise what’s the point?
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Tony Bennett
Tony Bennett
4 years ago
Reply to  MPO45
“What exactly are the “experts” wrong about?”
…
Direction of bond yields.  For Years I’ve been saying All Roads Lead To Lower Yields.
 Back in December:
Survey: Experts forecast strong rise in Treasury yields over next year
“Every single analyst surveyed by Bankrate expects the 10-year Treasury yield to be higher in a year.”
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Casual_Observer2020
Casual_Observer2020
4 years ago

Given the coming collapse of Russia, I think rates will climb slowly after 2022. The world isn’t going to be on the same trajectory it was a couple of weeks ago. Putin’s invasion has seen to that. 

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KidHorn
KidHorn
4 years ago
Reply to  Casual_Observer2020
I hope you’re right about Russia, but I could easily see them become close allies with China and China propping them up in exchange for resources. If that happens, Germany will eventually ally with them too. It makes too much sense not to. And then it would be the US that would collapse.
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StukiMoi
StukiMoi
4 years ago
Reply to  KidHorn
“Given the coming collapse of Russia”
“then it would be the US that would collapse.”
The more of them collapses, the better.
Possible reservation due to the sheer number of warheads each of those two have laying about. Last time “Russia” collapsed, they did manage to do so without warheads finding it’s way into the suitcases of crazies, so there may still be enough adults left to make such collapses sufficiently orderly.
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Sunriver
Sunriver
4 years ago
I agree with three hikes. But it won’t matter. Negative real rates are here forever unless the FED is no more. 
Mish, I nominated you for a FED chair position. Any luck?
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KidHorn
KidHorn
4 years ago
Reply to  Sunriver
I think low rates are here forever, but I wouldn’t rule out deflation at some point in the future.
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