First, what are you doing 1 month now and 2 months before 1 month?
figure 1: 1-month treasury bond yield (blue-green), 1-month forward average 2-3-month yield (red), all in %, oil spot price (WTI) (black) and front month futures (yellow-green) as All units are in USD/barrel. Sources: Treasury via FRED, EIA via FRED, barchart.com, and author’s calculations.
Note that the January forward average 2-month yield rose with the release of the January CPI, while the 1-month yield started to rise following the Russian invasion of Ukraine and the corresponding spike in oil prices. This suggests to me that the January CPI release marked a higher trajectory for federal funds over a three-month period, while Russia’s incursion sparked an even further hike.
figure 2: 5-year inflation breakeven, 5-year Treasury minus 5-year TIPS (blue), 5-year breakeven, adjusted for risk and liquidity premiums, per DKW (pink), in percent, oil spot price (WTI) (black) ) and near-month futures (chartreuse), both in USD/barrel. Source: Treasury via FRED, KWW per DKWEIA calculated by FRED, barchart.com, and the author.
At least in 2022, the 5-year inflation breakeven point (unadjusted) moves almost in tandem with oil prices, rather than an inflation surprise.
image 3: Ten-year-three-month Treasury spread (blue), ten-year-two-year spread (red), both in percent, oil spot price (WTI) (black), and front-month futures (yellow-green), All are in USD/barrel. Sources: Treasury via FRED, EIA via FRED, barchart.com.
The 10-2 year recovered from a brief reversal, while the 10-3 month spread continued to remain relatively high – the highest since December 2016. What does this inversion mean? 10 to 2 years did not reverse before the last (admittedly unique) recession, while Each of the past four recessions has been between 10 years and March. In my opinion, the 10-year to 3-month spread has historically been more accurate in predicting recessions (see Discussion here), but who knows – maybe this time is really different.
