BENGALURU – The US Treasury yield curve, already hammered into a flat line after one of its worst quarters in decades, is set to remain off its normal upwardly-sloping shape over the coming year, according to a Reuters poll of bond strategists.
The gap between two-year and 10-year US Treasury yields has been inverted in the last several trading sessions. Such an inversion, when sustained, has been a reliable early warning of most US recessions since the Second World War.
Forecasts for a flat to slightly inverted curve come despite expectations that the Federal Reserve will soon start reducing its bond holdings, letting securities accumulated during the pandemic roll off its near-$9 trillion balance sheet.
The March 29-April 5 poll of nearly 60 fixed-income strategists showed no sharp rise was imminently expected in 10-year notes, leaving the yield curve either flat or consistently at risk of further inversion over the coming year.
“If you asked me what’s going to be the dominant trend over the next phase, six to 12 months, it’s going to be the Fed pushing up the short rate expectations and a split between the behaviors of the yield curve that will drive further flattening,” said Robert Tipp, chief investment strategist and head of global bonds at PGIM Fixed Income.
He said two-year notes would keep following the fed funds rate up but alongside that, “the five-year and longer part of the curve keeping faith that at some point the secular fundamentals are going to become soft again.”
Just in the past few months, as inflation has soared to multi-decade highs, market expectations have surged from a series of steady 25 basis point Fed rate rises at each meeting this year to a succession of half-point moves. – Reuters
