Account Info
Log Out
English
Back
Download
Log in to access Online Inquiry
Back to the Top

Time to 'Screaming Buy' Treasuries? Wall Street Bets on A Steeper Yield Curve as Labor Market Cools Off

avatar
Moomoo News Global wrote a column · Sep 4, 2023 04:39
All releases last week,including job openings, ADP employment report, and August payrolls report, indicated a cooling U.S. labor market. As investors trade with a "bad news is good news" approach, they are betting that a slowing economy and weakening labor market will prompt the Fed to adopt a less aggressive stance. According to CME's FedWatch tool, the markets indicate a 93% probability that the Fed will keep rates unchanged at the upcoming September meeting and over a 60% likelihood of no more hikes this year.
"There are signs of the economy slowing, which is what the Fed wants to see; It likely opens the door for no rate hike at the next Fed meeting in three weeks," said Ryan Detrick, chief market strategist at Carson Group in Omaha.
"Monetary policy implications are relatively straightforward -- it just got a lot harder to justify a hike in Q4; September is off the table; even if there is a modest upside surprise in the August CPI series," Ian Lyngen, head of U.S. rates at BMO said in a note last Friday.
Below are the U.S. 10-year and 2-year Treasury yields and their spread trend. The data indicates that the negative 10-2 yield spread has significantly narrowed since June. As traders anticipate that the Fed is done with rate hikes, they are more interested in trades with a steepening yield curve, betting that short-term notes will outperform long-term bonds when market participants focus on the potential timing of a Fed pivot towards easing.
Time to 'Screaming Buy' Treasuries? Wall Street Bets on A Steeper Yield Curve as Labor Market Cools Off
As Jeff Rosenberg of BlackRock Inc. said, policy-sensitive 2-year Treasuries have become a "screaming buy." In addition to this institution, an increasing number of bond market investors are also endorsing this perspective.
Michael Cudzil, a portfolio manager at Pacific Investment Management Co., said that the jobs data leaves "the bond market comfortable with the view that the Fed is on hold for now and maybe done for the cycle; If they are done for the hiking cycle, it's then about looking at the first cut that leads to steeper curves."
George Goncalves, head of U.S. macro strategy at MUFG, said that the employment reports looked like "the beginning of the end of the robust job market and the countdown for how long can the Fed stay on hold; this will favor the front-end versus the back-end."
Subadra Rajappa, head of U.S. rates strategy at Societe Generale, suggested that "the trade to be in is steepeners; Either the market starts to price in more Fed cuts and the curve bull-steepens, or the Fed stays on hold with strong data and long-end sells off in that case."
Apart from simply taking a long position in U.S. 2-year bonds, investors can also bet on a steeper yield curve by constructing a spread trade using U.S. Treasury futures. This particular trade is based on slope changes rather than outright yield changes. As U.S. Treasury futures prices move inversely to yield, buying a 2/10 yield spread using futures indicates anticipation of a steeper slope or increase between the 2-year and 10-year yields.
Source: Bloomberg, MacroMicro, CME Group
Disclaimer: Moomoo Technologies Inc. is providing this content for information and educational use only. Read more
27
1
1
+0
4
Translate
Report
14K Views
Comment
Sign in to post a comment
avatar
Moomoo News Global
Moomoo News Official Account
Follow the top news of US market!
45KFollowers
7Following
20KVisitors
Follow
More from Moomoo News Global