The Corridor Narrowed 9 Basis Points. The Front End Did None of the Work.

2s10s closed at 35.0 basis points on the par curve, from 44.0 a week ago. The 10yr fell 15 and the 2yr fell 6, rate volatility did not fall at all, and equities sold 1.9%.

The corridor is the gap between what Washington pays for 2 years of money and what it pays for 10. Last Monday that gap was 44.0 basis points on the Treasury's par curve. On Friday's close it was 35.0. 9 basis points of compression in 5 sessions, and the interesting part is where it came from: the 2yr fell 6 and the 10yr fell 15. The long end did the work and the front end did none of it. That is the shape of a duration bid rather than a policy repricing, because nobody moved the expected path of the funds rate; they simply paid more for the back of the curve. This column has argued since September that the corridor contains one end at a time. This week it contained the long end rallying. The test is whether risk assets agreed with the reason for it. They did not.

What moved

The 2yr fell 6 basis points on the week to 4.74%. The 5yr fell 13 to 4.89%. The 7yr fell 15 to 4.98%. The 10yr fell 15 to 5.09%. The 20yr fell 18 to 5.47%. The 30yr fell 17 to 5.43%. The 3-month bill rose 1 to 4.26%. All levels are the 16 October par close.

The long end is still in the top eighth of its 3yr range. The 5yr sits at the 88.1st percentile, the 7yr at the 87.5th, the 10yr at the 86.9th, the 30yr at the 86.1st and the 20yr at the 85.9th. The 2yr is at the 81.9th and the 3-month bill at the 33.7th.

2s10s closed at 35.0 basis points, from 44.0 a week ago. The 10yr cash note closed at 5.098% and the 30yr at 5.436%.

Away from rates the dollar index is 101.84, unchanged on the session. USD/JPY is 157.917, off 0.226. Gold is $4,198.30, up $17.20. Silver is $57.85, up $0.85 and $3.24 below last Monday's $61.09. Copper is $6.612, up $0.081 and in the top 6% of its own 3yr range. WTI is $96.99, off $4.42.

The composite headline is +0.309, regime NEUTRAL, on 5 of 5 sub-indices. Rates & Policy is dominant at +1.178; Liquidity is the drag at -0.589. A week ago the headline was +0.255. Almost all of the change is Credit & Stress, which moved from -0.16 to +0.272.

The compression came from the back end

The arithmetic is the argument. The 10yr fell 15 basis points and the 2yr fell 6, so the spread narrowed 9. Two thirds of the compression came from the long end falling faster; the remaining third came from the front end failing to follow it down.

That is a bull flattener, and it is not the shape of a policy repricing. A policy repricing moves the 2yr first and the 10yr second. This moved the 30yr 17 basis points and the 3-month bill up 1.

The site's derived series, which uses the on-the-run cash note rather than the par curve, printed 35.8 on the same close. This column quotes the par curve throughout, because that is the print Treasury publishes and the one that can be checked.

2 weeks ago the spread was 44.7 basis points on that derived basis with the long end selling and the composite carrying a TIGHTENING tag. The direction reversed, the tag came off, and the reversal is now 9 basis points on the par curve.

The real yield gave back September

The 10yr cash note closed at 5.098%. The 10yr breakeven is 2.35% (as of 16 Oct), which leaves a real 10yr yield of 2.748%.

A week ago this column printed 2.914%. The fall is 16.6 basis points, and it takes the real rate back below its 23 September level of 2.76%, giving back the whole of the 24 September rise to 2.85%.

Inflation compensation did not produce it. The breakeven is 2.35%, against 2.33% a week ago and 2.32% on 15 October. The nominal did all of the work.

The real yield is the price of duration after expected inflation is stripped out, and it is the one rate that cannot be talked down by a policy expectation. A 16.6 basis point fall in a week with breakevens flat is the market charging less for 10 years of term risk than it was on Monday.

Rate volatility did not fall with the yield

MOVE is 101.1, up 0.4 on the week and at the 53.9th percentile of its 3yr range. A long-end rally that leaves rate volatility unchanged is not a rally the vol market has agreed to.

Equity volatility took the other side. VIX is 19.99, up 5.15 on the week, and still only at the 20.1st percentile of its range.

The S&P 500 fell 152.10 to 7,659.44, a loss of 1.9%, and sits at the 95.7th percentile of its 3yr range. The Nasdaq 100 fell 1,695.60 to 29,187.55, a loss of 5.5%; QQQ fell $41.47 to $709.80.

Treasuries rallied, rate vol did not compress, equity vol rose 5 points and the growth index lost 5.5%. The duration bid and the risk bid were the same trade in the same week, with opposite signs.

Credit took the other side

High-yield OAS is 3.23% (as of 15 Oct), from 3.11% (as of 9 Oct). The 14 October print was 3.25%, the widest since 31 March, when it was 3.28%.

Investment-grade OAS is 0.84% (as of 15 Oct), from 0.83% (as of 9 Oct).

Cash credit split along the same line as the curve. TLT added $2.07 on the week to $80.05 and LQD added $0.99 to $103.40. HYG lost $0.37 to $76.86 and JNK lost $0.55 to $92.28.

Treasuries and investment grade rallied; high yield did not. A curve that flattens while the riskiest spread widens to a 6-month high is a market pricing slower growth, not easier money.

The cash flow still does not corroborate it, which remains the normal order rather than a contradiction, since spreads widen before defaults arrive: initial claims were 199,000 in the week to 10 October, from 198,000 in the week to 3 October, and continuing claims were 1,710,000 in the week to 3 October, from 1,714,000 in the week to 26 September.

The buffer is empty

Reserve balances were $3,022.1bn on 14 October, from $3,029.7bn on 7 October: a drain of $7.5bn in a week. Overnight RRP take-up was $0.1bn on 16 October, from $0.3bn on 9 October.

Secured overnight money was 3.89% on 15 October, according to the New York Fed's reference-rate release, against an administered rate of 3.90%. The spread is minus 1 basis point. Effective fed funds is 3.88%.

There is no parked cash left to absorb the next drain. When reserves fall now the adjustment happens in the funds market rather than in the RRP, which is why the SOFR-IORB spread is the number to watch and the RRP level is no longer one.

A front end anchored 1 basis point below the administered rate and a back end that rallied 17 basis points in a week are still two different markets. The corridor is the width of the disagreement between them.

Bitcoin: the common paid, the preferred held

BTC is $82,767.34, off $320.13 on the week, down 0.39% over 5 sessions and up 2.32% over thirty. ETH is $2,428.43, off $66.42.

MSTR is $136.83 (as of 16 Oct), off $17.51 on the week, a fall of 11.3%, at the 23.6th percentile of its 3yr range. Against a net asset value of $182.29 per share that is 0.75 times the coins it holds.

The preferreds did not follow the common all the way. STRC is $97.72, off $1.44, still at the 93.6th percentile of its range. STRF is $103.60, up $0.39. STRK is $71.24, off $4.96.

Bitcoin fell four tenths of a per cent and the common fell eleven. The compression is in the multiple, not in the asset. It happened in the week the real 10yr fell 16.6 basis points, which is the week a leveraged treasury should have been easiest to own; the market repriced the wrapper anyway.

What would change the read

The first break is the corridor reopening at the long end. 2s10s back above 44 basis points with MOVE back above 107 would say the compression was a 1-week episode and the term premium is being paid again.

The second is the real rate. A 10yr real yield back above 2.90% would reverse the whole of the week and put the September repricing back on.

The third is credit. High-yield OAS back through 3.00% would say the widening was inventory rather than deterioration, and return the story to rates alone.

Between here and those three lines the read is that the back end rallied, the front end watched, and risk assets priced something the curve has not yet admitted.