The US Treasury curve bear steepened with 2x10 spread now at -64 bps. Yield curve is considered an important predictor of recession. The FOMC forward projections outlined a case of strong economic growth with estimates of growth in 2024, 30 bps lower than the trend growth of 1.80%, lower inflation which falls to 2.00% by 2026, U/R of 4% in 2026 but higher interest rates of 2.90% against longer run FFR of 2.50%. Economic resellience of the US economy may have pushed the neutral rate higher in the short term. The point on neutral rates was raised in the press conference following the FOMC meeting and Fed Chair acknowledged that short term neutral rates may have moved higher.
Bond market 2x10 inversion touched a peak of -111 bps. The recent steepening could simply be explained as a consequence of US economy being on a path of soft landing , when a situation of sharp cuts to policy as priced by the bond market earlier may not fructify.
The data also supported further rise in yields. Both the initial jobless claims and continuing claims declined which led to a further sell off in bonds with yields on US2s trading an intraday high of 5.20% before closing at 5.15% while the yields on the US10s traded an intraday high of 4.50% before closing the day at 4.48%.
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