Well, that curve steepening everyone has been waiting for came calling on Tuesday courtesy of futures-led selling, on high volumes. Other than that, chalk it up to folks unwinding flatteners into year-end. “Treasury Sell-Off Is Relentless, Backed by Heavy Futures Volumes,” a Bloomberg headline reads.
30Y yields hit 2.828%, breaking above their 50- and 100-DMA’s:
This is the second straight day of bear steepening. 5s30s steeper by more than 2bp, through 60bp:
Bunds sold off as well apparently in response to a Reuters story about “life after QE” in Europe. “Discussions are more and more shifting from asset purchases to possible future use of interest rates to regulate the economy,” Makuch is cited as saying in Bratislava. And then there was this on Weidmann:
In remarks published on Tuesday, the head of Germany’s Bundesbank, Jens Weidmann, reiterated his view that the ECB should have set a clear end date for QE and that its policy would remain easy even after that in view of the huge stock of bonds it already owns.
Additionally, Germany said it will tap debt markets for EU183b next year versus a planned EU172b in 2017. “The federal government will need to borrow more next year because it has to pay back more old debt to creditors than this year,” a spokeswoman for the Finance Agency remarked.
Whatever the case, 10Y yields surged to their highest level since December 1:
So you know, make of this whatever you will. Just remember: too much bear steepening isn’t necessarily good news if you’re the type who worries about tantrums and/or if you’re hoping policymakers won’t be forced to surprise the market with their communication.
We’ll leave you with some color out on Monday from Goldman:
We expect rising US policy rates and term premium to gradually drive 10y rates higher, with the long end also rising more than market pricing. We also expect further US term structure flattening. For much of 2017, the term structure flattened because long-end rates fell, not because short-end rates rose. Indeed, by early September, US 10y rates had fallen 36bps, while US 2y rates had risen only 9bps on the year. But since then, US 2y rates have risen more than 55bps, while US 10y rates have increased only 29bps.. In 2018, we expect 2y rates to be the driving force in flattening, as was the case in previous late cycles; CFTC positioning also shows investors are more bearish US 2y than 10y rates.
Eventually we would expect a flatter yield curve to signal rising recession risk and a warning for risky assets, in line with history. But we do not forecast this in 2018 – we are OW equity and UW bonds over both 3 and 12 months in our asset allocation. As we have shown previously, the term slope currently is at a level historically inconsistent with broader macro concern and likely should fall closer to zero before signaling worry for risky assets. Our rates strategists forecast the US 10y-2y slope at 35bps at 2018YE
