Steepening Curve Signals Higher Long-End Yields
The S&P 500 finished the day higher by a little more than 50 basis points. It was a typical Monday, following a Friday that saw the VIX 1-day fall to 9.5 from 16.4. After a while, it becomes somewhat nauseating to see the same pattern repeat so regularly. Still, it clearly sends a message: with volatility essentially reset at this point, the index is once again likely to stall.
In other news, the quarterly refunding announcement came in hotter than I expected, based on what I had read, with the second quarter emerging as the surprise. The Treasury now expects to issue $109 billion, assuming a Treasury General Account (TGA) balance of $900 billion. Yes, the TGA target was raised to $900 billion from $850 billion, which is not surprising given the size of the US debt, and again something I frequently highlighted.
Rates were higher for most of the day following the hotter-than-expected ISM manufacturing report, but they took another leg higher after the Treasury’s 3:00 p.m. ET announcement. On Wednesday morning, we will find out how the issuance will be broken down.
The 30-year minus 3-month spread is once again at the upper end of its bull flag pattern. At this point, if the spread can break above the 1.25% level, it could accelerate higher, with potential upside towards 1.7% to 1.75%.
Barring some kind of downside shock, the yield curve would likely continue to steepen through a rise in the 30-year rate.
As noted yesterday, Palantir’s key resistance level from an options positioning standpoint was $160, and that is where the stock stalled in after-hours trading. If the stock cannot clear that level, it would not be surprising to see the gains reversed, with shares moving sharply lower in tomorrow’s trading session.
-Mike
Glossary by ChatGPT
After-hours trading – Trading activity that occurs after the regular market session has closed, often marked by lower liquidity and higher volatility.
Basis points – A unit of measurement equal to one hundredth of a percentage point, commonly used to describe changes in interest rates or yields.
Bull flag – A technical chart pattern indicating consolidation after a strong upward move, often preceding another advance.
ISM Manufacturing PMI – A monthly survey-based index that measures the health of the U.S. manufacturing sector.
Options positioning – The distribution of outstanding options contracts that can influence price behavior around key strike levels.
Quarterly Refunding Announcement – The U.S. Treasury’s regular update outlining expected borrowing needs and debt issuance plans.
Treasury General Account (TGA) – The U.S. government’s primary checking account held at the Federal Reserve, used to manage cash balances.
VIX 1-day – A short-term volatility measure reflecting expected equity market volatility over the next trading day.
Yield curve steepening – A move where long-term interest rates rise faster than short-term rates, increasing the slope of the yield curve.
Yield spread (30-year minus 3-month) – The difference between long-term and short-term Treasury yields, often used to assess economic and rate cycle dynamics.
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You’re right, it is the same pattern all over again. Yet, it looks to me that the 1 Day MA on the SPY is starting a (remarkably slow) downturn.