UST 2s & Euro$ Futures *Whites* Both Ask, Landmine At Last?

Since the FOMC sets those alternative rates, most of the time – like the whites and reds in eurodollar futures – the 2s simply project forward policymakers’ intended rate path. If officials say they are going to aggressively raise their policy rates, that’s where prices in the 2s are going to begin.

However, there comes a time when it just isn’t so simple as Fed says, market does. Even short-term maturities like the 2-year note are going to face complications, including those which might be priced into the back end of the yield curve. Inversion there, as it is now, indicates a strong emerging consensus about all manner of eventual negative outcomes only starting with recession.

So, the 2s are for all intents and purposes the pivot between the back end where growth/inflation expectations trade independent of the Fed’s projections and policies, and faith across the market in the ability of the Fed to actually carry out its planned path and purposes. Those two competing views collide right here on the curve.

Should the 2-year yield ditch the Fed path to instead begin trading more aligned with the farther out notes and bonds, the 7s or 10s, that’s a troublesome sign for whatever is bothering the far end is no longer being fretted over as some distant future concern. When the short-term notes like the 2s stop worrying about the Fed’s rate hikes and start pricing something else, the problem must be a more immediate one.

Following the past month when the 2s seem to have been ignoring the Fed’s increasingly loud (shrill) bluster about inflation and pain, there is now a substantial and heightened possibility the short run notes (never mind bills) are, in fact, rejecting rate hikes altogether. The most aggressive FOMC stance since 1994, yet the market isn’t going along any longer.

This other curve has been heavily inverted in its back end, though its inversion had already cut deep into the reds. In more normal times (these times just aren’t normal, and what’s abnormal isn’t inflation), the front contract packs, whites and reds, would be just like the 2-year UST note all about the Fed’s rate hike path.

Red is Fed; or was.

In other words, eurodollar futures are corroborating the rejection move in the 2-year Treasury. Again, whites – even more than reds – are supposed to be all Fed all the time. Bad news, obviously, for Jay Powell and his inflation-is-the-biggest-risk rationale with so much of the overall market now shifted to being more worried about the deflationary scenarios driving each back-end inversion.

The more 2s yields drop, the further up the curve into the whites the eurodollar futures inversion spreads, the more you know what’s going wrong has turned into (more of) an immediate problem.

Landmine at last?