By Karen Berough and Gertrude Chavez-Dreyfus
Oct 28 (Reuters) – Investors are measuring what the furious flattening of the yield curve in the United States suggests about growth expectations and how strong the Federal Reserve is in tightening monetary policy in the face of rising inflation.
Yields on 20-year Treasuries rose several times on Thursday above 30-year notes, a move analysts are pinning on technical factors, including rising demand for more liquid 30-year notes. Yields move inversely to bond prices.
Market participants watch the shape of the yield curve to extrapolate investors’ expectations of growth and monetary policy in the United States. Sometimes inverted curves warn https://www.reuters.com/article/us-usa-economy-yieldcurve-explainer/countdown-to-recession-what-an-inverted-yield-curve-means-idUSKBN1ZR2EX and some recessions Analysts said that the slope that begins at the short end of the yield curve is most important to the economic outlook.
“I wouldn’t take a 20/30-year yield reversal as a signal of recession,” said Dan Bilton, a fixed income analyst at BMO Capital Markets in Chicago. “This move has a strong technical component given that it is quite off the yield curve. Moreover, no other reference prices have been reversed.”
“The market set a steeper price-raising trajectory which caused the entire yield curve to flatten, albeit not inverted,” Belton said.
Fed policymakers are expected to announce plans to gradually reduce the central bank’s monthly purchases of $120 billion in Treasury securities and mortgage-backed securities at the conclusion of their November 3 meeting.
Analysts said expectations that higher inflation would bring a faster start to Fed rate hikes pushed short-term yields higher in recent days, while long-term yields slipped as the market is betting rates won’t rise as previously expected. . “The market is saying that the Fed will raise rates sooner than previously thought, and in doing so it will kill any semblance of inflation, so there will be no need to raise rates later,” said Roberto Burley, head of global policy at Cornerstone Macro.
As a result of the yield moves, the closely watched gap between the two- to 10-year bond narrowed to 97.7 basis points earlier Thursday, making the curve more stable since August, although not close to reversing. At 73.4 basis points, the five- to 30-year bond yield curve was at its lowest since March 2020.
However, the recent flattening in the three-month bill of the 10-year bond curve has not been widespread with the spread starting this week at 158.6 basis points, currently around 151 basis points.
Another factor in flattening the curve is the uncertainty about another term for Jerome Powell as Federal Reserve chair and the possibility of a more hawkish central bank, Cornerstone Macro reported on Thursday.
“We should see a partial reversal of the latest curve flattening if Powell is reasserted,” she added. “We say in part because doubts about continued inflation will remain, and lower actual inflation will be required to significantly reduce expectations of rate hikes.” (Reporting by Karen Pirog and Gertrude Chavez-Dreyfus; Editing by Ira Eosbashvili and Chizu Nomiyama)