First, what are the current one month and 1 month forward 2 months doing?

Figure 1: One month Treasury yield (teal), one month forward average 2-3 month yield (red), both in %, spot price of oil (WTI) (black), and near month futures (chartreuse), both in $/bbl. Source: Treasury via FRED, EIA via FRED, barchart.com, and author’s calculations.

Notice one month forward average 2 month yields rose with the January CPI release, while the one month yield started rising with the Russian invasion of Ukraine and the commensurate spike in oil prices. That suggests to me that the January CPI release signaled a higher trajectory of Fed funds at the three-month horizon, while the Russian invasion sparked a movement even more forward of rate increases.

Figure 2: Five year inflation breakeven, 5 year Treasury minus 5 year TIPS (blue), 5 year breakeven adjusted for both risk and liquidity premia, per DKW (pink), both in %, spot price of oil (WTI) (black), and near month futures (chartreuse), both in $/bbl. Source: Treasury via FRED, KWW per DKW, EIA via FRED, barchart.com, and author’s calculations.

The 5-year inflation breakeven (unadjusted) has moved pretty much in tandem with oil prices, rather than inflation surprises, at least in 2022.

Figure 3: Ten year – three month Treasury spread (blue), ten year – two year spread (red), both in %, spot price of oil (WTI) (black), and near month futures (chartreuse), both in $/bbl. Source: Treasury via FRED, EIA via FRED, barchart.com.

The 10yr-2yr has recovered from its brief inversion, while the 10yr-3mo spread has continued to stay relatively high — the highest since December 2016. What did that inversion mean? The 10yr-2yr did not invert before the last (admittedly unique) recession, while the 10yr-3mo has in each of the last four recession. In my view, historically, the 10yr-3mo spread has been more accurate in predicting recessions (see discussion here), but who knows — perhaps this time might really be different.