The yields on short-term Treasuries have been offering up some important tells recently. Below we highlight the yields on 6-month, 12-month, and 2-year Treasuries over the last 12 months. After trading with a positively sloped curve (the longer the duration, the higher the yield) through the first half of 2022, the yields on all three began to converge in late July/early August. In November, the 2-year yield started to drift lower, while yields on the 6-month and 12-month held firm. And just in the last week or so, we’ve seen the yield on the 12-month start to drift lower as well, while the yield on the 6-month has ticked slightly higher. As things stand now, the 2-year yield is at 4.18%, the 12-month is at 4.66%, and the 6-month is at 4.82%. This means the 2-year is inverted with the 6-month by 64 basis points, while the 12-month is now inverted with the 6-month by 16 basis points.

Yields on these three Treasuries are telling investors (and the Fed) where “the market” expects the Fed Funds Rate to be over the duration of the maturities. Right now the market expects rates to peak at some point in mid-2023 before ultimately pulling back. The fact that no points on the Treasury curve are currently above 5% tells you what the market thinks about the Fed’s unanimous support of getting the Fed Funds Rate above 5% and holding it there.  It’s not buying it. While “the market” sees inflationary indicators falling pretty much everywhere it looks, Fedspeak has so far been unwilling to acknowledge any meaningful progress. The more inverted we see longer duration yields become with the 6-month T-Bill, the more damage the hawkish Fedspeak will become. 

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