Key Takeaways
- Major banks are betting on a steepening US yield curve.
- Inflation data and Fed rate cuts are crucial for this bet.
- Economic and political developments will shape bond market trends.
What Happened?
Wall Street’s biggest banks, including Citigroup, JPMorgan, and Morgan Stanley, are betting that the US yield curve will steepen throughout 2024. This trade received a boost after President Biden’s June 27 debate performance eased Trump’s path to the White House, leading investors to anticipate higher yields on longer-term Treasuries.
The yield curve steepened further last Friday when signs of a softening job market increased expectations for Federal Reserve rate cuts, pushing short-term yields down. The gap between 5- and 30-year yields reached its widest since February. However, the market is now looking to the upcoming consumer price index (CPI) data to confirm these bets.
Why It Matters?
A steepening yield curve signals expectations of stronger future economic growth and higher inflation, making it a key indicator for bond investors. The anticipation of Fed rate cuts is crucial for this trade. Cindy Beaulieu, Chief Investment Officer for North America at Conning, believes that both inflation and fiscal policies can drive the steepening trend. Investors are focusing on the CPI data, which Bloomberg’s survey indicates will show the slowest annual rise since January, as this would support the case for rate cuts.
What’s Next?
The Federal Reserve’s actions will be pivotal. If the Fed starts cutting rates aggressively, it could validate the steepening bet by pushing short-term yields down more than longer-term ones. However, skepticism remains. Baylor Lancaster-Samuel, CIO at Amerant Investments, cautions that recent jobs and inflation data do not yet justify significant rate cuts, suggesting the Fed might maintain restrictive rates into 2025.
Meanwhile, Goldman Sachs strategists predict little change in the yield curve by the end of the year, citing past trends during Trump’s presidency when tariffs led to a flatter curve. On the contrary, TD Securities forecasts a potential quadrupling of the spread between 5- and 30-year yields if Fed cuts materialize and high deficits persist.
