Spreads Diverge as Inflation Breakeven Drops

Big daily movement in 10yr, 5yr yields:

Figure 1: 10yr-3mo Treasury spread (blue), 10yr-2yr spread (red), Treasury-TIPS 5 year spread (green). Light blue dashed line at June income and outlays release. Source: Treasury via FRED, and author’s calculations.

The 10yr-3mo spread rose, while medium term inflation expectations eased. Five year real rates are back into the positive region. If risk and liquidity premia were constant, I’d think expectations of economic activity were up; but that would be going a bit far.