Yields and the FOMC Minutes

This article was originally published on Nadex.com.

The 2-year note yields reached 2.58% last week, the highest in 10 years. The 10-year note reached it’s highest level in almost 8 years at 3.115% and the 30-year hit 3.247%, the highest in almost 3 years. With this type of price action, one might think the yield curve flattened, but it actually steepened.  The 2-year/10-year curve went from 47 basis points (bps) on May 1st to 51 bps on Friday and the 2-year/30-year curve from 63 bps to 65 bps. This is surely part of the reason why stocks have not really suffered with the 10-year solidly above that treacherous 3% level that everyone seemed to fear.  Since Tuesday which is when the 10-year started basing above 3% the Dow is only -.3%, the S&P -.2%, and the Nasdaq-100 is only -.6%. Hardly the dramatic rotation some predicted. That could change this week however as we get a glimpse into the thinking if the Jay Powell lead FOMC.

May minutes

Wednesday at 1:00 PM central time we get a look at the FOMC minutes from the May 2nd meeting and while that meeting did not include the drama of a rate hike as did the March meeting, it could still give some clues as to how the committee and especially Chair Powell was feeling about the economy and the direction of rates. At that time the 10-year yield had breached 3% already and had fallen back below that level by meeting time and the yield curve was essentially unchanged (2-10 yield curve was at 48 on April 2nd and at 48 on May 2nd). If there is any sense of extra “hawkishness” within these minutes, you could see the Dow, S&P, and Nasdaq push lower. The market has already priced in a slightly more aggressive Fed by pricing on a 5%chance of a 50 bps rate hike in June to go with the 95% chance of a 25bps hike. If the minutes push the narrative that “normalization of rates needs to happen at a quicker pace, then equities may go lower at a quicker pace as a result. 

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