'Relentless Flattening in US Rates' Continues


A more hawkish Federal Reserve led to more yield curve flattening last week and the ripple effects are  continuing this week.

Intermediate Treasury yields rose as the Fed pointed to a steady pace of rate hikes for the next few years, despite a dip in inflation,  and seemed likely to  accelerate its timetable for scaling back its balance sheet.

Meantime, 30-year bond yields fell as investors saw more Fed hikes leading to lower inflation.

As of Tuesday morning, the spread between the five-year and 30-year Treasury yields was 97 basis points, the lowest since December 2007, Bloomberg reports.

John Briggs of NatWest Markets wrote Tuesday morning:

The relentless flattening in US rates was driven by Dudley's more hawkish comments yesterday, with 30yr yields closing just about unchanged while the front end bore the brunt of the selling. The flattening is continuing overnight, steamrolling any fading that may occur, though it is important to note that we ourselves saw a heavy amount of flattening flows yesterday, suggesting there may be more pain to the move than not. But beyond positioning, the market reaction overall was interesting to me because it continued to reflect, in my opinion, the market saying "if you still want to tighten, fine, but you'll do less than you think and it will be even worse for future inflation that it is now." It is also interesting to me that Dudley and Yellen used to be viewed as doves, but now because of high business and consumer confidence levels and loose financial conditions, Dudley at least is sounding hawkish, while Harker and Kashkari are sounding dovish. Quite a switch.

Russ Certo of Brean Capital wrote to clients Tuesday morning:

I happen to think there could be some volatility in shape of curve and wouldn't be surprised to see some steepening work develop some momentum... I like the belly vs. long end and front end could hold value.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.



This article appears in: Investing , Investing Ideas


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