February CPI (excluding food & energy) year on year was 6.1%, and in Feb 2021 was 1.3%. that makes the 2Y inflation expectation about 4.8%. Fed Funds at the minute are on neutral. ECB and BoE are in much worse positions. In theory, Fed Funds should be hiked between 6.0% and 7.0% to achieve real positive yield on cash, deposits and other cash instruments as money market funds.
Treasuries market seems to misprice the 5Y,5Y Forward Inflation expectation. 2.18%, averaging the 10Y and 5Y treasuries yield. CPI(excluding food & energy) 5Y,5Y Inflation expectations are 3.7%.
that’s how’s the yield curve at the minute. And the market yields seem to be pricing Inflation expectations, rather than 5y-5y Forward expectations nominal yields and tips.
The 2y Treasury yield seems mispriced here by about 70 | 80 basis points. In fact, the chart of the 2Y Treasury already shapes an H&S pattern. Price line drifting lower could be possible to see a $99 dollar handle, even a $98’30, $98’28 price.
last but not least, observing the Treasuries yield curve the 1Y Yield tends to anticipate the Fed Fund rate. and it seems Yield 4.677% pricing in a 25 basis points decrease in the future. That will depend on Inflation.
