To quantify the extent the market has “tightened” policy for the Fed, the yield spread between the 2 yr note, which is highly sensitive to expectations for the future direction of the fed funds rate, and the 10 yr note, very sensitive to inflation and growth expectations, has been trading at around 289 bps for the past two trading days. This is just 2 bps from matching the record high reached one yr ago (dating back to 1977 when the 2 yr started trading). While many will look to the Fed for when they will start their “exit strategy,” the market will start the process well before.
