Near Term Outlook
February 7, 2022
We recently shifted our yield curve focus from the 5/30-year spread to the 2/10 spread to account for rising concerns of a potential Fed policy mistake. A ‘policy mistake’ occurs when Fed rate hikes cause a recession. There’s a fairly strong correlation between an inverted 2/10 curve and recession ~6-9 months forward. The recent flattening of the 2/10 curve reflects a more aggressive Fed rate hike cycle and hopes to reduce balance sheet holdings later this year. The 2/10 curve (spread) is still positively sloped at 62bps, which remains above strong technical support in the 53-60bps range. We expect the 2/10 curve to find a footing at current levels, but remain below resistance at ~75bps for the foreseeable future.