Overnight, the US Treasuries curve further steepened, driving the 2Y/10Y spread to -14bps. Importantly, key resistance at -20bps has been cracked and the market appears to be targeting par. There are several observations from the market actions. First, popular trades (including long tech and long USDJPY) are being unwound. Second, despite the risk-off sentiment, there was no flight to safety in US Treasuries. Typically, we would expect the curve to flatten and the long-end to benefit when stocks head lower. However, this time, the long-end continued to sell off, with 30Y yields up by 8bps. Third, the front end got a bid as former New York Fed governor Dudley suggested that the Fed should cut immediately. Note that Dudley has consistently been hawkish and this marks his pivot in the cycle.
We expect further curve steepening to play out in this cycle. The front end of the curve is likely to be anchored as the Fed embarks on an easing cycle. That said, there are some nuances. While not our base case, the Fed could embark on a shorter, sharper recalibration cycle (cut once every meeting over a shorter period) if needed. We also note that a fair amount of easing is already priced into the front of the curve. For the long end, investors are clearly more opportunistic. 30Y US yields below 4.40% does not offer much comfort if the US's fiscal trajectory is likely to worsen and issuances weigh. The term premium needs to be rebuilt. Even the belly tenors may be somewhat vulnerable at these levels and we note that the 5Y auction tailed by about 1bp.
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