Bloomberg - - Federal Reserve Bank of Atlanta boss Raphael Bostic has been talking about the new yield curve for more than two weeks now. But rates investors aren t yet convinced it will rebound as he predicts following its recent turbo-charged flattening.
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Bostic was among the loudest central-bank voices talking about the gap between rates on different maturities two years ago, when the curve was hurtling toward a so-called inversion - when near-term rates drop below long-end ones in a distortion that is often seen as a harbinger of recession. This time around, he says that as the economy builds he is confident that the yield curve will steepen once again and get us back to more normal conditions - but now the market appears skeptical.
The widely watched differential between 5 - and 30-year yields plunged below 100 basis points after Fed decision last week. While it has recovered to around 108 basis points, that is still a far cry from its highs earlier this year. Fed officials like Bostic have often shown interest in the shape of the curve for what it says about the trajectory of economic growth; a stronger curve tends to coincide with steeper expansion prospects, so it would be unsurprising that Fed officials with an eye on normalizing policy would be of that view.
Long-term rates have certainly climbed in recent days, with the 50 year yield up more than a quarter of a percentage point since the middle of last week. Yet even amid this shift, positioning data suggests that some investors are holding long Treasury positions. And price action indicates traders are coming in to buy Treasuries when yields rise to attractive levels, potentially putting a lid on such moves.
And perhaps more importantly, the moves at the front end of the curve were even more aggressive. The past week has seen money-market traders increase their bets on the pace of Fed tightening, pulling forward their expectations for the first quarter-point rate hike by the central bank to late 2022, having earlier placed it in 2023.
That left the curve, by and large, in limbo. The market has shown almost no sign of the kind of telltale trades in futures or options that would suggest traders are once again taking on either steepening positions or flat bets.
The steepening trade has been very successful in recent years, but a number of Wall Street banks have called it time in the past few months in anticipation of a Fed hike cycle, and there is little indication that this is changing just yet.
Jonathan Cohn, a strategist at Credit Suisse Group AG, says the curve will get rid of as its deflation in the end of the year. He forecasts 5 - year yield will rise to around 1.25% at year-end and that 30-year rates will reach 2.30%. That outcome would leave the gap between maturities close to where it is right now.
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