Last week, we saw more bear steepening of the curve, with 2-year Swaps up 11 BPS and 10-year Swaps up 18 BPS. The Yield curve is exceptionally flat right now. The three Treasury auctions last week all went well, and we got very strong jobs data once again. JOLTS came in at 8 million, which is more openings than the surveyed number. Initial Jobless Claims were 201k, a very low print. The blowout number of the week was Nonfarm Payroll (256k vs. 165k surveyed). This accounted for most of the bear steepening and selloff, and Unemployment also ticked down on Friday.
With strong jobs data and sticky inflation, the Fed does not need to rush their cutting cycle. All but one cut have been priced out for 2025, and the only anticipated cut should come later in the year. If inflation remains sticky and growth runs hot, we could see a significant selloff, and additional hikes could even come back into play. However, this is unlikely, barring a massive change to inflationary print. This week, we get PPI tomorrow and CPI Wednesday, both of which are expected to remain consistent MoM.
It may be wise to lock in hedges for floating-rate debt now to mitigate risks of upside inflation surprises and a persistently strong economy. On the flip side, the high-yield environment creates potential for borrowers to defease or prepay debt at a discount, provided current loan coupons are below corresponding Treasury yields.
