Tags: treasury | bond | curve | fed | rate | hike

Curve Flattening Back on Bond Traders' Radar as Fed Hike Looms

Curve Flattening Back on Bond Traders' Radar as Fed Hike Looms
(Dani3315/Dreamstime)

Tuesday, 05 June 2018 06:12 AM

The shape of the U.S. yield curve may be one of the most exciting topics in fixed income this week.

After a mid-May pause, the curve-flattening phenomenon that dominated the Treasuries market for months has roared back. The gap between yields on two- and 10-year notes shriveled to as little as 40 basis points last week, the smallest since 2007, as traders rebuilt bets on Federal Reserve rate hikes in 2018.

With little in the way of significant economic data or debt auctions this week, and no Fed speakers, traders will be left to focus on the central bank’s path after a widely expected June 13 rate hike. That means the rejuvenated flattening trade could keep chugging along. The catch is that for some analysts, the curve is approaching levels that may worry policy makers, because an inversion has historically been a reliable recession indicator.

“Flattening has been something of a simmering trade, ” said Aaron Kohli, a rates strategist at BMO Capital Markets. Investors are “thinking about the Fed’s reaction not at zero, but the approach to zero, and when participants really start to sweat because at that point you’re basically a hair away from inversion.”

For Kohli, the curve area around 40 basis points is important to watch, because it’s a support level that’s held three times since April. A drop below there could push the market toward 20 basis points, Kohli and fellow BMO strategist Ian Lyngen wrote in a note Friday.

That would be significant to the analysts because in a survey they conducted before Friday’s labor-market report, clients indicated that around 20 basis points would be a level that would worry the Fed. Last month, some officials signaled concern about the curve heading toward inversion. Atlanta Fed President Raphael Bostic called it “my job to make sure that doesn’t happen.”

Normalization Blamed

Last week, St. Louis Fed President James Bullard attributed the spread narrowing to the Fed’s rates normalization. He said the central bank doesn’t have to “be so aggressive as to invert the yield curve.”

But Friday’s robust U.S. jobs report may extend the flattening march, by keeping alive the possibility of four hikes this year. The overnight index swaps market is pricing in 55 basis points of tightening for the rest of the year, versus 51 basis points before the data.

The benchmark 10-year yield ended last week at 2.9 percent, after rebounding from the biggest tumble since 2016 as traders moved past some of the political concern emanating from Europe.

For Jonathan Cohn at Credit Suisse, the flattening move raises some risks as well: If officials object to the trend, the curve could steepen again and drive longer-dated yields higher.

With a further flattening push, the market focus will turn to “curve inversion and to the Fed rhetoric around that,” the strategist said. “You’ll see a selloff, another break through 3 percent and then talk of a bear market will return.”

© Copyright 2019 Bloomberg News. All rights reserved.

   
1Like our page
2Share
InvestingAnalysis
The shape of the U.S. yield curve may be one of the most exciting topics in fixed income this week.
treasury, bond, curve, fed, rate, hike
489
2018-12-05
Tuesday, 05 June 2018 06:12 AM
Newsmax Media, Inc.
 

Newsmax, Moneynews, Newsmax Health, and Independent. American. are registered trademarks of Newsmax Media, Inc. Newsmax TV, and Newsmax World are trademarks of Newsmax Media, Inc.

NEWSMAX.COM
MONEYNEWS.COM
© Newsmax Media, Inc.
All Rights Reserved