The Market Today

Flattest Treasury Curve Since April 2020 Amid Geopolitical Uncertainty and Prospects for Significant Fed Tightening

by Craig Dismuke, Dudley Carter


Mortgage applications for the week ending February 18 fell another 13.1% WoW as the impact of higher mortgage rates takes a toll.  The average 30-year mortgage rate inched up 1 bps to 4.06%, the highest rate since September 2019.  Refi apps fell another 15.6% and continued their downward trend that began in early-2021, down 63% over that period.  Purchase apps broke out of their positive trend falling 10.1% to their lowest level since spring 2020.  As an indicator of home sales, the purchase applications data do not yet point to a sharp decline.


Home Prices Close Out Record 2021 with Another Stronger-than-Expected Gain: Home price gains were stronger than expected in December based on the latest releases from both the FHFA and S&P CoreLogic. The FHFA House Price index rose 1.2% in the final month of 2021, a bit firmer than the 1.0% gain expected, while the S&P CoreLogic 20-City Metro index jumped 1.5%, outpacing the expected 1.1% increase. Additionally, gains of more than 1% for November were nudged higher in revision. Compared with December 2020, the S&P CoreLogic 20-City index rose 18.6%, stronger than the 18.1% gain economists forecasted, and slightly weaker than the 18.8% increase reported for its nationwide index. The stronger-than-expected increases, the product of strong demand amid low rates and too little inventory, brings a fitting end to the strongest year on record for home value appreciation.

Markit Reported New Record for Price Increases As Economy Bounced Back from Omicron Slowdown: Preliminary PMI data from Markit showed the U.S. economy recovered more than expected in early February following a period of weakness around the turn of the year. The Composite PMI jumped from 51.1 to 56.0, breaking a three-month stretch of slowing activity and easily beating expectations for a smaller rise to 52.5. The Manufacturing index rose from 55.5 to 57.5 while the Services index notched a particularly strong recovery, recouping 5.5 points of a three-month slide that had knocked the index down to its lowest level since July 2020. Markit noted that activity and hiring picked up across both the manufacturing and services sectors of the economy as the Omicron wave faded and demand increased. And while some moderation in constraints on supply was noted, prices charged to end users rose at a record pace. Markit deduced the dynamics, “will add to expectations of a more aggressive policy tightening by the FOMC.”

Consumer Confidence Declined in February As Expected: Consumer confidence declined from 111.1 to 110.5 in the Conference Board’s February report, a slightly better result than the 110.0 economists expected but still the second weakest reading since February 2021. The present situation index actually improved from 144.5 to 145.1 while the expectations index edged modestly lower from 88.8 to 87.5. The underlying details showed a general moderation in the assessment of and outlook for business conditions, employment opportunities, and income growth all softened on balance from January. Plans to purchase big ticket items stepped down as one-year inflation expectations inched back up after a couple of monthly declines and the number of consumers expecting interest rates to rise touched its highest level since January 2019.

Richmond Fed Index Shows Current Moderation, Stronger Outlook: The Richmond Fed’s Manufacturing Index fell unexpectedly in February, countering the positive message projected by the broader national PMIs released by Markit earlier in the day. The headline index fell 7 points from 8 to 1, a five-month low and disappointment relative to the expected reading of 10. An index tracking current employment trends posted an encouraging recovery from an 18-month low. Most current activity indicators, however, were notably softer. Current inflation metrics edged down from all-time high levels but remained notably elevated and there appeared to be some improvement in supplier delivery delays. Despite the cooler current assessment, most forward-looking indicators pointed to a pick-up ahead.


Flattest Treasury Curve in Almost Two Years As Yields Rise Despite S&P 500 Entering Correction Amid Geopolitical Risks: Markets were volatile Tuesday as major Western countries announced economic sanctions against Russia in response to their actions in Ukraine. Rising geopolitical uncertainty led to an unusual sell-off across asset classes, as the prices of equites, Treasury securities, and gold all declined in tandem. Despite a positive close for European stocks and strong overnight recovery for U.S. futures, U.S. equity indices declined by at least 1%, failing to take advantage of an early afternoon recovery and selling off into the close. The Dow led losses with a 1.4% drop that left the index at its lowest level since June. The S&P 500 fell 1.0%, joining the Nasdaq in correction territory and notching its lowest close since early October. The Nasdaq fell 1.2%, nearly reaching January’s low close which was the weakest level since May. While equity negativity was broad across all sectors, Treasury yields actually pushed higher. The 2-year yield led all gains despite a strong Tuesday auction, rising 8.4 bps to 1.55% as fed funds futures once again priced in a chance of seven rate hikes this year. While geopolitics pose a risk, some analysts explained the higher rates by pointing to the potential for the Russia-Ukraine conflict to boost energy prices and exacerbate an already-concerning inflation situation. With the 10-year yield rising just 1.0 bp to 1.94%, the spread between the two maturities tightened more than 7 bps to 38.4 bps, its flattest level since April 2020.

Treasury yields continued to press higher overnight and global equities strengthened during a lull of major developments related to the situation in Ukraine. Europe’s Stoxx 600 was 0.9% higher around 7 a.m. CT following smaller gains across Asia. U.S. futures were comfortably in positive territory with the Nasdaq’s 1.1% gain leading the way and the S&P 500 moving 0.8% higher after falling into a correction yesterday. Treasury yields continued to climb as investors weighed the potential impact of geopolitical conflict and limited first round of economic sanctions against the outlook for significant monetary policy tightening this year. The 2-year yield rose 2.0 bps to 1.60%, a new cycle high, as the 10-year yield added 3.0 bps to 1.97%. The marginal steepening left the curve near its flattest level since the initial pandemic turmoil.

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