The Treasury market is trading slightly lower this morning, even though one of the key inflation numbers came in lower than expected. The Consumer Price Index in October rose 0.3% as a headline number, and up 0.2% as a core number. This takes the year-over-year numbers to 2.5% and 2.1%, respectively. The actual drop in the core year-over-year rate should not be ignored because it all but confirms a trend of stable inflation, which could give the Fed a reason to pause, should they wish to do that now or next year. The Fed Funds Probability Index is still suggesting that there is a strong chance (77%) the FOMC will raise rates when they meet on December 19th. The bond market is dealing with a number of issues, but none of them seem to be dominating trading. You would think that as the equity market sells off, risk off assets like Treasuries would benefit from this, but they aren’t. You would think that the big drop in oil prices would help push rates lower on the long end of the curve, but it isn’t. You would think that the strength of the dollar would help the market tied to our currency in general, but it really isn’t doing all that much to either expand the interest or contract it. Maybe some of these things can be cleared up when Chairman Powell speaks with Dallas Fed President Kaplan about the U.S. economy later today. So here we sit with the 10-year trading around the 3.15% level, while maintaining a curve spread (2’s/10’s) of 25 basis points. Something needs to give here and if the Fed keeps tightening, we may get our wish. Volatility, after surging at the end of October, has dropped back down to a near-term slumber. “Apathy” could actually be the current feeling, but why? There are a number of things currently in play and you would think, as a result of this, we would see more volatility than we are now. Again, that may be changing because credit spreads are beginning to widen in the very space that they have defied gravity, which is the investment-grade space. Whether this is a short-term event or a potential “tsunami” that pushes its way down the credit stack remains to be seen, but if there is a chink in the armor, this could be it. Traders have a reason to be nervous. When you lose the cause/effect relationship between the news and the market’s reaction to it, you are basically flying blind, and that doesn’t usually end well.
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