When the 2s10s curve inverted on August 14, Donald Trump took to Twitter to express his disdain for what he called a “CRAZY” development in capital markets.
It was hardly as inexplicable as the president made it sound. Yields were already sharply lower on the year, and the August 1 tariff escalation undermined an already tenuous growth outlook. Stretched positioning, convexity flows and low liquidity served as accelerants, and before you knew it, 10-year yields were below 1.5% in the US amid a furious rally at the long-end.
Fast forward to December and we’ve seen two sizable bond selloffs since the August rally. 10-year yields stateside are back to 1.90% and as of Thursday, the 2s10s had steepened back out to the widest since 2018 (bottom pane).
With the exception of SocGen (whose house view calls for a mild US recession in 2020), Wall Street sees yields sticking in and around current levels through the end of 2020, which is notable considering analysts’ penchant for projecting markedly higher yields in their annual year-ahead outlook pieces.
In any event, when you think about the re-steepening, it’s worth noting that the2s10s term premium curve is still mired in what BofA calls an “extraordinary” inversion.
That section of the ACM curve has been inverted for the better part of two years, the bank’s Bruno Braizinha notes, adding that it’s only widened by a meager 13bps since August, versus more than 34bps for its nominal counterpart.
Anyone familiar with the term premium debate knows what to “blame” (if that’s the right word) for the stubbornness – it’s the appetite for USD assets and an environment characterized by a persistent monetary policy divergence between the US and the rest of the world.
Although that divergence has now closed a bit thanks to the Fed’s trio of “insurance” cuts, it’s still pretty wide. Meanwhile, the “mountain of global sovereign debt trading in negative territory” (as BofA puts it) means that when it comes to havens, Treasurys retain their appeal.