The yield curve for US Treasury bonds is expected to flatten and perhaps invert this year, according to Standard Chartered.

  • 31 January, 2022
  • 4:25 pm EET

The yield curve for US Treasury bonds is expected to flatten and perhaps invert this year, according to Standard Chartered.

The U.S. Treasury yield curve is likely to be totally flat by mid-year as the Federal Reserve raises interest rates, although growth is questioned, and may invert by year’s end, Standard Chartered bank strategists stated in a research note.

The Fed’s aggressive approach has driven up short-term rates, flattening the carefully watched yield curve on US Treasuries.

Money managers and analysts frequently interpret the narrowing of the yield spread between shorter-term Treasuries and those maturing in later years as an indication of concerns about economic growth and monetary policy uncertainty.

The difference between the 10-year and 2-year yields on US Treasury paper US2US10=TWEB narrowed to early November lows on Monday, after hawkish comments by Atlanta Fed President Raphael Bostic.

In a research note issued on Friday, Standard Chartered’s Steve Englander and John Davies anticipated four Fed rate hikes in a row, in March, May, June, and July. This means that a pause before of the U.S. midterm elections “will not appear partisan,” they argued.

Englander and Davies raised their two-year yield projection for the end of 2022 to 1.5 % from 1.2 % , but predicted that the market will “increasingly question the robustness of growth during Q2 and beyond, leading to a completely flat 2Y/10Y curve by mid-year.”

The Federal Reserve is keeping an eye on the flattening of the US Treasury yield curve, but they don’t see it as a “iron law” that predicts economic outcomes, according to Chair Jerome Powell last week.

According to Englander and Davies, the flattening pressure may slow after July since the Fed’s rate hikes are expected to cease.

“However, given Powell’s opinion that yield curve warnings concerning slowdown/recession risks are not “iron clad,” they wrote, “we doubt that Fed messaging or actions will be able to prevent the 2Y/10Y curve from diving into inverted territory by year’s end.”


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