Once again, US Equity Indexes struggled to find a clear direction today and were trading near steady with about an hour left before the cash market closed. Implied volatility in the index options markets ticked down but was trading near the top of a one standard deviation move over the last six months. Earlier in the day, the CPI number release indicated a higher than expected level of inflation.
Perhaps that CPI release led to the nearly 2% increase in the price of Gold futures and the decline in the US Dollar relative to most major currencies. For the second day in a row, we saw yields rise in the short end of the curve and fall at the longer end of the curve. Specifically, in the Micro Treasury Yield futures:
Micro 2 Year Yield +2.2 basis points
Micro 5 Year Yield +1.7 basis points
Micro 10 Year Yield -2.8 basis points
Micro 30 Year Yield -6 basis points
As we wrote about yesterday, this represents a further “flattening” of the yield curve or, in other words, the difference between longer term yields and shorter term yields decreased. In fact, since last Friday, the difference in the 2 Year and 10 Year yield has decreased by nearly 6 basis points and the difference between 2 Year and 30 Year yield has declined by almost 17 basis points.
Interestingly, along with the recent modest increase in short term Treasury yields, we’ve also seem some changes in the CME Group FedWatch tool which uses Fed Funds futures prices to try to assign probabilities for a change in the Fed Funds target rate at each FOMC meeting. The FedWatch tool reflects a nearly 10% probability of a rate hike at the March, 2022 meeting, up from 2.5% yesterday and a 17% chance of a rate hike at the May, 2022 meeting, up from 8.8%.
We used QuikStrike data to graph six months of price action in the traditional CME Group 2-Year Treasury Note futures contract since we don’t have historical data on the newer Micro 2-Year Yield contract. This shows the rise in yields that we wrote about but, as you can see, the line is downward since the traditional Treasury contracts are quoted in price and price moves inversely to yield.