Research Briefing | Jun 14, 2022

Trading Today: Markets in a sell everything mood

Treasury yields rocketed higher and the curve flattened sharply last week as rate hike expectations jumped. The 2-year yield jumped more than 40bp, leading the bear flattening selloff, which was the largest weekly rise for the 2-year since July 2008. The nearly 40bp rise in the 3-year yield was the largest since June 2009. The two-week rise in  2- and 3-year yields was the largest since April 2008. The 2-year/10-year spread narrowed 18bp. The rising inflation and economic growth concerns also pushed the S&P 500 Index 5.1% lower, and the Nasdaq 5.6% lower, but pushed the dollar index back above 104 as the euro fell back to test 105 ahead of the 103.5 mid-May low.

Markets are melting down to begin the week. Treasury yields are soaring, equity markets are crumbling, and commodity prices are tumbling. The dollar has been the main beneficiary, benefiting from the extreme flight to safety. Trading activity has been extremely heavy. Treasury futures flows have been around 270% of the twenty-day average, with activity in 2-year, 3-year, and 5-year futures more than triple the average. That included extremely heavy block trading activity in 2-year, 5-year, and 10-year futures, along with very heavy block trading activity in SOFR futures and options. 

What you will learn:

  • The Treasury market’s bear-flattening trend reasserted itself last week: The trend accelerated following the combination of the above expectations CPI data and the record low University of Michigan consumer sentiment data on Friday and continued overnight.
  • The direction of equities offers a potential risk to the outlook for a further rise in rates: Rising economic concerns have also hammered stocks, and the rising global central bank rate hike expectations and worsening economic outlook could keep stocks under pressure over the near-term.
  • The 2-year yield climbed above 3% on Friday in the wake of the CPI data, with the technical break above the 2018 high yield adding to the weakness as it reached 3.25% overnight. The 5-year yield jumped above the 2018 3.10% high, reaching 3.25% Friday and 3.41% overnight, adding to the bearish technical signals in addition to the pressure from the FOMC outlook.  
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