Analysis: US Treasury yield curve shifts could be set-up for Jackson Hole unwind

Analysis: US Treasury yield curve shifts could be set-up for Jackson Hole unwind

Recent changes in the U.S. Treasury yield curve suggest that market optimism about the economy may decrease. Some investors are looking to Federal Reserve Chair Jerome Powell’s upcoming speech as a potential trigger for a correction or rapid unwinding of positions.

For over a year, the yield curve comparing two-year and 10-year yields has been inverted, indicating a looming recession. However, in recent weeks, the curve has steepened as 10-year yields have risen while shorter-dated yields have remained flat.

This “bear steepening” suggests that the market no longer expects high interest rates to harm the economy. Investors are extending their outlook for how long the Fed will maintain its restrictive policy stance.

This shift in the yield curve aligns with rising market expectations for a “soft landing” for the economy, where the Fed controls inflation without causing a recession.

As a result, hedge funds have been increasing their bearish bets on long-term U.S. Treasuries. Net short positions in 10-year U.S. Treasuries futures are at their highest levels since July, according to Commodity Futures Trading Commission data. This buildup of short positions increases the risk of an unwinding.

Crowded trades can be problematic, as many investors trying to exit positions simultaneously can cause volatility. Michael Harris, president of Quest Partners, likens it to “100 elephants trying to squeeze through one door.”

Some analysts warn that rising yields could lead to higher borrowing costs, potentially causing the economic slowdown that investors are currently betting against.

Gennadiy Goldberg, head of US Rates Strategy at TD Securities USA, states that the repricing for higher rates and the expectation of a “higher for longer” Fed policy is tightening financial conditions. This tightening could strain the economy and markets.

The key question is how much further the yield curve needs to steepen for investors to become nervous, according to Goldberg.

Although the 2/10 curve has steepened recently, it has flattened in the last few days. Similar bear-steepening episodes in the past have not lasted long, according to Alfonso Peccatiello, CEO of The Macro Compass.

Investors often become frustrated when anticipated recessions fail to materialize as the Fed nears the end of its tightening cycle. This frustration can lead to aggressive tightening in bond markets just as the economy is slowing, creating a dangerous situation, warns Peccatiello.

Several Wall Street banks have revised their forecasts for a U.S. recession due to strong economic data. However, risks remain, including higher rates for companies refinancing debt and China’s weakening growth, according to Jonathan Cohn, head of US Rates Desk Strategy at Nomura Securities International.

It’s possible that the capitulation on recession calls has happened too soon, says Cohn.

Investors generally expect the Fed to have reached a peak in interest rates and to maintain them in the current range until easing begins in the second quarter of next year.

Some investors are concerned that Powell’s speech at the Fed’s annual economic symposium could trigger a short squeeze. If Powell’s message does not convey a commitment to maintaining rates, the market could move in the opposite direction, leading to an unwinding of short bond positions.

Eoin Walsh, a partner and portfolio manager at TwentyFour Asset Management, suggests that Powell may take a softer stance, allowing him to be more market-friendly.

Conversely, if Powell reaffirms the need for further tightening to combat inflation, short-term yields could rise, sparking a rally in long-term bonds. This could be seen as accelerating an economic downturn.

A very hawkish read from Powell would cause bear flattening, with the front end of the curve rising and the back end coming down. However, this scenario is seen as unlikely.

Overall, the market is waiting to see how Powell’s speech will impact the yield curve and investor sentiment.

Reporting by Davide Barbuscia and Carolina Mandl; Editing by Michelle Price, Megan Davies, and Mark Porter

About News Team

Hi, I'm Alex Perez, an experienced writer with a focus on lifestyle and culture news. From food and fashion to travel and entertainment, I love exploring the latest trends and sharing my insights with readers. I also have a strong interest in world news and business, and enjoy covering breaking stories and events.

Have a tip we should know?

Most Read

  1. News
    Pandora Papers Financial Leak Shows Us the Secrets of the World’s Rich and Powerful
    3 years ago
  2. Health
    US Supreme Court Rejects J & J TALC Cancer Case Appeal
    3 years ago
  3. Lifestyle
    9 Habits that Drain your Daily Focus and How to Avoid Them
    3 years ago
    Women’s Demand for Shapewear – the big Trends
    3 years ago
    Valentino Launches its Cosmetics Line
    3 years ago
  6. Health
    US Promises to Share 60 million Doses of AstraZeneca Vaccines
    3 years ago
  7. Health
    UK Offers Aid Amid Surging COVID-19 Cases in India
    3 years ago
  8. Sports
    Thousands of fans welcome Charlton funeral cortege at Old Trafford
    6 months ago
  9. News
    Brit left fighting for life after train derails in Argentinia
    6 months ago
    Dubai faces down airline rivals with $50 bln jet orders
    6 months ago
  11. Sunak
    UK’s Sunak brings back Cameron, sacks Braverman
    6 months ago
  12. Sports
    Man United’s Hojlund, Eriksen withdrawn from Denmark team duty
    6 months ago
  13. Health
    Autumn Sneezing Syndrome is on the rise… here’s what you can do
    6 months ago
  14. Canada
    Canada beat Italy to win Billie Jean King Cup for first time
    6 months ago

Follow @rushhourdaily: