The US yield curve steepened sharply amid growing calls for the Federal Reserve to start cutting interest rates as soon as next week.
Yields on policy-sensitive two-year Treasuries slid three basis points on Wednesday, while those on 10-year bonds were up by about the same amount. That pushed the differential between those yields to about 14 basis points, the smallest margin since October 2023.
That’s an indication investors see the Fed potentially reducing rates faster and deeper than previously anticipated. Swaps traders still price in more than two quarter-point cuts this year, with the first move likely in September.
But with the central bank scheduled to announce its next decision in a week, pressure is rising for lower borrowing costs. In a Bloomberg Opinion column, former New York Fed President William Dudley said policymakers should reduce rates at the July gathering.
“The front end has been rallying on the idea the Fed will cut sooner and more than the market had previously been pricing,” said Zachary Griffiths, a senior fixed-income strategist at CreditSights.
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Such moves show a revival of the yield curve’s steepening — a favoured wager of investors who expected Donald Trump to win the presidential election in November.
On Wednesday, the yield on 30-year Treasuries rose as much as 7 basis points to 4.55%, the highest level since July 5. That widened its differential against the five-year note’s yield to as much as 38.7 basis points. That marked the steepest level since May 2023.
The steeper yield curve reflected a “combination of 100% market probability of a September cut, equity selloff, and repositioning of election news,” said George Catrambone, head of fixed income at DWS Americas.
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After the Fed’s July meeting, he said focus will turn to a flurry of data reports for evidence of material weakness that “may bring renewed questions about the soft landing and perhaps the Fed falling back behind the curve and missing the opportunity to cut rates in July.”
Economic data on Wednesday showed manufacturing slipped back into contraction territory and sales of new US homes unexpectedly declined in the US.
Hours later, a US$70 billion ($94.08 billion) sale of five-year notes came at a yield of 4.121%, above the 4.110% level at which the when-issued security traded just as auction bidding completed. That was seen as a mediocre result when compared to record-setting demand for Tuesday’s US$69 billion sale of two-year securities.
The moves in long-dated yields led the Treasury to accept no offers from dealers in a debt buyback operation on Wednesday.
