Yield spikes but spreads collapsed across the board on Thursday as the market priced in more rate hikes as well as sooner rate hikes by the Fed.

Yield Curve Spreads from the Fed and Mish Calculations 

Massive Bond Market Carnage 

There was massive bond market carnage on Thursday as yields spiked across the board.

Yields rose faster in the mid-tiers than the long end so the end result was a very bearish flattening.  

The 10-7 spread is zero and briefly inverted, that is the 7-year note yielded more than the 10-year note.

The 10-5 spread is down to 9 basis points and the 5-3 spread is 12 basis points. One basis point equals 0.01 percentage points of yield.

The much-watched 10-2 spread collapsed from 58 basis points to 42 basis points meaning rates on the 2-year note rose 16 basis points more than the yield on the 10-year note. 

Typically the 10-2 spread inverts before the recession but there is no requirement for that to happen. 

Half-Point Hike Now Expected in March

Rate hike odds courtesy of CME Fedwatch Tool.

The market now fully expects a half-point hike by the Fed at the March 16 FOMC meeting. 

Expectations gyrated wildly following CPI data and Hawkish Words by St. Louis Fed President James Bullard. 

“I’d like to see 100 basis points in the bag by July 1,” Bullard, a voter on monetary policy this year, said in an interview with Bloomberg News on Thursday. “I was already more hawkish but I have pulled up dramatically what I think the committee should do.”

The Fed could have and should have been hiking long ago. Now the economy is weakening and inversions loom before the Fed gets in its first hike. 

If the Fed does a half-point hike in March, I expect major inversions including the 10-2, signaling recession on the horizon.

CPI Trigger 

Consumer Price Index (CPI) data from BLS, chart by Mish

The BLS CPI report triggered the bond carnage as noted in CPI Jumps Most Since February 1982, Up at Least 0.5% 9 Out of Eleven Months.

Year-Over-Year Key Details

• The all items index rose 7.5 percent for the 12 months ending January, the largest 12-month increase since the period ending February 1982.
• All items excluding the food and energy index rose 6.0 percent, the largest 12-month change since the period ending August 1982.