The call for interest rate cuts is growing! The US bond yield curve is sharply steepening, with the 2/10-year Treasury yield spread hitting the lowest level in nine months
The U.S. Treasury yield curve has steepened sharply, as investors believe that the Federal Reserve may cut interest rates faster and more aggressively than expected. The yield on 2-year U.S. Treasury bonds has fallen, while the yield on 10-year bonds has risen, narrowing the yield spread between the two to the lowest level in nine months. This indicates that the market sees a 100% probability of a rate cut in September. On Wednesday, the 30-year U.S. Treasury bond yield reached its highest level since July 5th. Investors are expecting Trump to win the presidential election in November. The steepening yield curve also reflects the market's repricing of stock market sell-offs and election news
According to the Zhitong Finance and Economics APP, as the market's call for the earliest rate cut by the Federal Reserve next week grows louder, the U.S. Treasury yield curve has steeply changed.
The two-year U.S. Treasury yield, sensitive to policy changes, briefly fell by 3 basis points on Wednesday, while the 10-year Treasury yield rose by about 3 basis points. This narrowed the yield spread between the two to about 14 basis points, reaching the lowest level since October 2023.
This indicates that investors believe the Fed may cut rates faster and more aggressively than previously expected. Swap traders still expect more than two rate cuts this year, with the first possibly in September.
However, as the Fed plans to announce its next rate decision in the coming week, the pressure to lower borrowing costs is increasing. Former New York Fed President William Dudley suggested in an opinion column that policymakers should cut rates at the July meeting.
Zachary Griffiths, Senior Fixed Income Strategist at CreditSights, stated, "The front end of the yield curve has been rebounding, suggesting that the Fed may cut rates earlier and more aggressively than the market previously expected."
These trends also indicate a steepening yield curve trend, a bet favored by investors who anticipate Trump winning the presidential election in November.
On Wednesday, the 30-year U.S. Treasury yield briefly rose by 7 basis points to 4.55%, reaching its highest level since July 5. This widened its spread with the five-year Treasury yield, reaching up to 38.7 basis points, the highest since May 2023.
George Catrambone, Head of Fixed Income at DWS Americas, noted that the steepening yield curve reflects "market expectations of a 100% probability of a rate cut in September, stock market sell-offs, and repricing of election news."
He mentioned that after the Fed's July meeting, the focus will shift to a series of data reports to look for substantial evidence of weakness, which "could bring new questions about a soft landing, perhaps the Fed will lag behind the yield curve and miss the opportunity to cut rates in July."
Economic data released on Wednesday showed a contraction in U.S. manufacturing and an unexpected decline in new home sales.
Earlier, the U.S. Treasury issued $70 billion in five-year Treasury notes with a bid yield of 4.121%, compared to the pre-auction trading level of 4.110% at the 1 p.m. EDT bid deadline. This issuance was relatively subdued compared to the record demand seen in the $69 billion two-year note sale on Tuesday.
The movement in long-term bond yields led the U.S. Treasury to not accept any bids from dealers in bond repurchase operations on Wednesday