The spread between US 2-year and 10-year notes is down 4.5 bps today and it's flirting with some important levels.
It remains deeply inverted at -85.4, which is just below the low cycle close of -85.2 in December. There was a brief trade below that in November and December but we're flirting with uncharted territory here.
This has mostly been driven by higher front-end yields as the market sees the Fed getting to 5.13% in June. The spread could widen further if the market sees a) further hikes beyond that, or b) a recession. There was a strong bid for 10s at yesterday's auction and we get a 30-year sale today. I think some of that might be coming from Japan, where yields are pinned and that could be skewing the message from the curve.
In any case, I suspect the signals from the curve might be boomberanging back into the broader market and sapping the demand for risk assets.
That all sets up a challenging 30-year auction because if it's strong that means lower yields (good) but it will also mean a deeper inversion (bad). The good should still outweigh the bad but maybe not in the moment that we're getting headlines about fresh cycle extremes on curve inversion.
