• The bond market remains very, very jittery as liquidity is probably at rock-bottom levels. In overnight market action long(er) end US Treasury yields re-tested the Omicron lows after the AP reported that the first case of the new variant has been detected in the US of A. Inevitable of course, but the headlines still triggered a slide in yields on the long(er) end. Markets are giving Powell & Co little rope for tightening as the 2y10y yield spread is in the high 80bps now (before Omicron and the hawkish pivot in the 100-110bps range), which means less room for rate hikes before the yield curve flips.
  • And while Treasury and Eurozone govvies sold off earlier this week on Powell’s taper speed up talk, in our book Powell’s hawkish pivot is the best thing for bonds since the Volcker shock. If there was a time to inflate record debt levels away, now would be it. Clearly, the Fed is managing to avoid the temptation.

 

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