Interest rate worries and oversized bets on continued market stability led to severe gyrations in the stock market in February. The Treasury market followed suit, with significant intra-day price fluctuations. The yield of the 10-year note finished the month 16 basis points (bps) higher. The yield curve steepened by approximately 8 bps from 2 to 30 years.
The markets sharpened their focus on inflation data, with most of the measures, including CPI and core PPI, indicating an upward trend. Import prices moved up, a result of the weakened dollar. Interestingly, the break-even rates for TIPS moved only modestly during the month and the dollar actually reversed course and strengthened. Foreign demand for U.S. bonds appears to have declined, as hedging costs rose and there was continued concern about the direction of the dollar. Short positions in the 10-year Treasury were reported to be at extremely high levels.
Economic data was mixed during the month. The Conference Board leading indicator was higher than expected, as were ISM Manufacturing, consumer confidence, and housing starts. On the flip side, durable goods, new home sales, and retail sales came in lower than anticipated.
As the month came to a close, new Fed Chair Powell indicated that the Fed may consider four rate hikes this year, rather than three. The market continues to price in three increases.