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A
hawkish stance by the Fed has pushed up short-term rates,
flattening the closely followed yield curve on U.S. Treasuries.
Money managers and economists often view this shrinking of the
gap between yields on shorter-term Treasuries and those maturing
out years as a sign of worries over economic growth and
uncertainty about monetary policy.
The spread between the yield on 10- and 2-year U.S. Treasury
debt [US2US10=TWEB] tightened to early November lows on Monday
after hawkish comments by Atlanta Fed President Raphael Bostic.
Standard Chartered's Steve Englander and John Davies, in the
research note dated Friday, forecast four rate hikes from the
Fed in a row, in March, May, June and July. That will mean
pausing ahead of the U.S. midterm election "will not look
partisan," they said.
Englander and Davies said they were raising their two-year yield
forecast for the end of 2022 to 1.5% from 1.2% but said the
market "will increasingly question the resilience of growth
during Q2 and beyond, leading to a completely flat 2Y/10Y curve
by mid-year."
Federal Reserve officials are monitoring the flattening of the
U.S. Treasury yield curve, but don't view its behavior as an
"iron law" that predicts economic outcomes, Chair Jerome Powell
said last week.
Englander and Davies said that the flattening pressure may slow
post July as they expect the Fed's hiking to pause.
"However, given Powell’s view that yield curve signals
concerning slowdown/recession risks are not “iron clad”, we
doubt that Fed messaging or actions can prevent the 2Y/10Y curve
dipping into inverted territory by year-end," they said.
(Reporting by Megan Davies; Editing by Bernadette Baum)
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