Well, I suppose it’s only fitting that 2018 should close with 10-year yields back through 2.70 and sitting at their lowest levels since the February VIX spike.
Obviously, Monday’s action was on thin volume but it appears growth concerns and crude (interrelated) again played a role. 10-year yields have come in some 50bp off the highs. Here’s where we stand as the calendar flips.
Clearly, the growth narrative is dying on the vine. We’ve staved off inversion thanks to short-end repricing as traders now believe the Fed is done, but the growth jitters and plunging crude have eviscerated the reflation story.
The December payrolls report has the potential to be interpreted as negative no matter what it says. If it underscores economic resilience, market participants could construe that as something that would make the Fed more recalcitrant still, while any weakness will only “confirm” the slowdown narrative.
Insult is added to injury by the fact that real yields have remained stubborn, another negative for risk assets.
“[The] most important chart right now [is] the 2-year TIP yield”, our good buddy Kevin Muir remarked on Monday, adding that “for the first time in a decade, it’s now firmly positive [making] it tough for risky assets priced for perfection to compete.”
Underscoring all of the points made above, Kevin goes on to note that “ever since Powell’s October 3rd ‘long way from neutral” comment, markets have been pricing in a deflationary bust [with] 2-year breakevens collapsing from 1.84% on October 3rd to 0.68% today.” That sets up the most amusing chart of all: