Treasuries have continued to sell off as the Treasury market reprices both interest rate and inflation expectations. Recently, the yield curve has begun to steepen further, and the 2s – 10s inversion has gradually decreased. The longer end of the Treasury market has experienced a significant increase in supply due to Congress’s spending increases and liquidation by foreign debt holders. So the question arises: Is this the bottom in for shorter-duration Treasuries, like two year notes?
The two-year Treasury note exhibits interesting technical features. Currently, major trendline resistance and the 50-day EMA have converged at the 101’15 level, serving as a significant resistance point for the two-year note. To gain more upside conviction, we would need to witness a break and close above this level. A move higher is likely to coincide with softer economic data and inflation returning to the Fed’s 2% target. Conversely, if we continue to observe economic strength and persistent inflation, major support will remain at the 101’03’5 level. A break and close below this level is likely to trigger additional liquidation.
While the market is currently undergoing a substantial repricing of longer-duration Treasuries, the two-year note (shorter duration) price change will be less susceptible to interest rate fluctuations. Using the CME Fed Watch tool is an excellent way for traders to monitor the bond market’s current view of interest rate expectations
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