I have been keeping a keen eye on the Treasury 5-30 yield spread since mid 2013, with expectations that as the Fed moved closer to the old calendar guidance of mid-’15, this yield spread would trade much like it did back in 2004-2006. Since the March FOMC meeting, the spread has flattened by 20 basis points and is at the lowest levels since October 2011.
I continue to expect the move to 120 bps wide well before forwards project. However, the test of the Oct ’11 lows may bring some consolidation before a next leg lower. There does not seem to have been a rush to take on curve flattening positions over the last few sessions. Still, only months ago, we could regularly read articles that suggested a safe position would be to own 5-year Treasuries. We know of a major west coast fund manager who has risked much holding onto the expectation that the Fed would be slow to move policy rates and that the 5-year Treasury offered value.
We should expect there to be some more dramatic price swings over the next 9 months as economic data presents varying pictures to the proper conduct of Fed policy, a policy clearly in transition and still being ironed out. For guide, Fed officials are just a little slow in expressing distraught over the post-March FOMC yield jump in the belly of the curve. Absent a more vocal Fed, there is little reason doubt what was said by Yellen in suggesting good chance for a Q2 ’15 firming of policy rates.