The US yield curve has started steepening, not only 2s10s but also 10s30s, see the first chart below.
There are three reasons why this is happening:
1. The Fed is cutting rates.
2. If the market thinks the Fed is cutting for political reasons, it puts upward pressure on inflation expectations and ultimately long rates, which also steepens the curve, see the second chart.
3. Growing Treasury issuance is putting upward pressure on long rates, see the third chart.
If Fed Chair Powell, in his Jackson Hole speech on Friday, is going to signal less commitment to the Fed’s 2% inflation target, the curve will steepen further.
We have put together a chart book looking at this topic, including some of the recent weakness in Treasury auctions. It is available here.
Sources: Bloomberg, Macrobond, Apollo Chief EconomistNote: Ticker used USSWIT1 Currency. Sources: Bloomberg, Macrobond, Apollo Chief EconomistNote: The NY Fed measure for the term premium is based on a five-factor, no-arbitrage term structure model. Sources: Federal Reserve Bank of New York, Macrobond, Apollo Chief Economist
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