Originally posted by Stilt
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On yields, not that simple:
Yields have dropped across the curve, there is a bull-flattening move. 2yr yields dropped 16bps to 3.50%, and have outpaced the 13.5bps decline in the 10 year yield to 3.27, this signals: (1) an increased probability of fed easing acceleration (I don't necessarily agree w/ the market and I'm kind of too lazy to explain why the fed won't cut rates and "ease" as soon and as much as the markets are pricing in) and (2) a deteriorating growth expectation (risk-off sentiment), so what does this mean? The market is interpreting that growth risks are gaining prominence in the Fed's policy calculus.
FedWatch shows markets are pricing in a 69.4% probability of of a 325-350 bps rate by May 2025, implying approximately 50-75 bps of cuts from current levels, followed by another 50 bps of cumulative easing by June 2025 (66.1%) — which contradicts Powell's statement that "it is too soon to say what will be the appropriate path for monetary policy." Powell specifically warned that tariff effects "will include higher inflation and slower growth," while also mentioning the uncertainty around tariff impacts, ergo the market is overly confident in its easing expectations
On ICS (Interest Rate Futures Inter-Commodity Spreads, 1st image):
- The TYT spread (2yr-3yr) has moved from -0.8 to +0.9, indicating a shift in the front-end slope
- Steepening is evident across multiple points (TUT, NOB, BOB spreads), suggesting markets are pricing a transition from restrictive to accommodative policy
- The yield spread between 2yr and Ultra T-Bond (TUL) is particularly wide at 88.2 intraday, reflecting maximum curve steepening expectations
Front-End to Belly Dynamics (TUF: 2yr-5yr):
Yield spread widened intraday by 2.6bps to 7.6bps.
This steepening suggests market pricing increasingly aggressive near-term Fed cuts while maintaining longer-term rate expectations
The shift in TYT from negative to positive territory represents a fundamental reassessment of near-term policy trajectory.
Belly to Back-End Dynamics (FYT: 5yr-10yr):
Marginal narrowing of yield spread to 15.0bps (-0.3bps).
This flattening indicates concerns about long-term growth prospects
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Now, onto metals and commodities!!
To put it simply, there is no deflation in metals, if we are talking macro. If we are not, and we are talking about near term, or like one week ... if there is, I don't really care.
Bessent's agenda is something called the three arrows:
(1) 3% real economic growth through deregulation and forward guidance of confidence.
(2) 3% federal deficits by the end of 2028 through the freezing of non-defense spending.
(3) 3 million more oil barrels or equivalents a day of energy production and lower oil prices.
Under Trump's Three Arrows strategy, metals would experience inflationary rather than deflationary pressures despite lower oil prices. This apparent contradiction emerges because a deliberately weakened dollar would make metal imports more expensive while simultaneously supporting domestic metal prices. The strategy's reindustrialization focus, a "strategic decoupling," creates significant metal demand for manufacturing revival. The Three Arrows create this divergence by targeting energy independence through increased hydrocarbon production (3 million more barrels equivalent daily, pushing oil toward $50 ~ 40/barrel) while enabling monetary easing through fiscal discipline (3% federal deficits by 2028) and deregulation-driven growth (3% real economic growth). This policy combination creates the conditions for what Bessent calls "a proper easing cycle" to deliberately weaken the dollar, making U.S. exports more competitive globally (or so he surmises). The outcome is mercantilism on steroids through three channels: energy exports, industrial attraction via cheap energy, and currency manipulation—all supporting higher metal prices despite cheaper oil.
Anyhow, I don't care for the administration, but it's how I make my money, so I have to understand it.
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The graphs below are for context on the yields bit.
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