Front end hammered
January 16, 2026
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–Thursday featured dramatic flattening with the 2y yield up 5 bps to 3.562% and 30s down 0.7 to 4.789%. TYH6 was -8/32 to 112-07 while USH6 was unch’d at 116-10. Attached is a chart of FVH6 which closed at the low and appears vulnerable to lower levels. Only the 2-yr now has a lower yield than EFFR of 3.64%. Fives have positive carry with a yield of 3.762. While econ data was stronger than expected (Jobless Claims 198k and Philly Fed positive 12.6 vs small negative number expected) it feels like there’s more behind the shift to higher yields. (If I KNEW I wouldn’t be sitting here…)
–New recent low in 2/10 at 59.8 puts that spread back in last year’s April to November range; the recent pop to 71 now looks suspiciously like a false breakout. A lot of chatter about mortgages now at the ‘new and improved’ level of 6%. It’s obvious that the admin will do anything it can to manipulate markets in the pursuit of policy goals; the latest being a proposed cap on household electricity prices.
–An amusingly ironic price reaction to policy was yesterday’s pasting of HOOD and COIN, both down over 7%, due to uncertainty over the CLARITY bill. Maybe that’s the dark 2026 theme for markets in general: a lack of clarity.
–However, as I mentioned yesterday, implied vol in treasuries is low and getting cheaper. BBG’s MacroMan Cameron Crise put out an interesting piece yesterday on the low level of realized vol in tens.
–While recent price action suggests the Fed is on hold, one trade from yesterday went the other way: A sale of 35k FFJ6/FFK6 at -4.0 which appears new from open interest. April settled 9641 and May at 9645, so 3.59% and 3.55% vs EFFR 3.64%. The FOMC meeting is April 29, so of course an ease will take the spread to nearly -25 as May gets full benefit of any Fed move and April will have only 1 day at the new EFFR. This spread is a reasonable play on a new chairman, and of course there’s some chance of a 50 bp cut.
