Seismic Bond Shift Has Traders Watching Yield Curve’s Moves

Bond traders are growing convinced that US Treasury yields are on the brink of returning to the way they’ve traded for most of their existence — it’s the how, why and when of the normalization that keeps financial markets bouncing around.

The shift many investors bet is now underway would see the interest rate on 10-year Treasuries rise above those on US two-year notes, a steepening of the so-called yield curve that would mean banks and investors get rewarded for the risk of lending money for longer periods as is typical.

That’s a world away from last July, when two-year Treasury yields exceeded 10-year ones by more than a full percentage point. It was the sort of deeply inverted yield curve last seen in the early 1980s, a side effect of the Federal Reserve’s series of rate hikes aimed at fighting inflation. The campaign, it was feared, risked tipping the economy into recession.

A Lengthy Inversion and No Recession

Veteran investor Bill Gross, the co-founder of Pacific Investment Management Co., and Harley Bassman, a long-time bond expert who invented the MOVE Index of Treasury market volatility, are among those predicting that chapter will soon end.

What is the subject of fierce debate is what propels the pivot, and the answer means money for some and losses for others. If rate-cuts emerge as the economy slows then yields will shrink on the short-end, but if inflation remains a concern and the Fed stays on hold then 10-year yields will rise more in a higher-for-longer scenario.