Spread between 5 and 30 Year Notes Tumbled

The spread between five- and 30-year notes tumbled last week to the narrowest for the year after the Fed projected two interest-rate increases by the end of 2023. The flattening move was aided by a scramble to unwind curve steepeners, with the likes of Morgan Stanley and TD Securities stopped out of recommended trades, while Goldman Sachs analysts unwound outright 30-year short positions.

The shift creates room for other central banks to turn more hawkish without fueling excessive gains in their currencies, triggering a flattening in the yield curve elsewhere. Australia’s three- and 10-year spread is at the tightest since February and a similar trend was observed in New Zealand.

The FOMC’s rate outlook has pushed short-end rates higher while longer-end rates fall as traders calculate that there’s now little risk that U.S. inflation will remain above target for long. St. Louis Fed President James Bullard added fuel to the debate on Friday, warning that inflation risks may necessitate a rate hike next year.

Reference:

Bloomberg, 2021-06-21, “US 30 Year Yield Drops Below 2% For First Time Since February”