Yield Curve Re-Flattens After Hitting Resistance, 5Y At 20-Month Highs

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by Tyler Durden
Thursday, Oct 21, 2021 - 10:27 AM

It's been a volatile week in bond-land with the curve flattening significantly early on, then steepening all the way back only for that resistance to hold and today we see a return to flattening in the 5s30s curve...

Source: Bloomberg

As Bloomberg's Paul Dobson notes, while it can be unsettling to see longer-maturity bond yields fall even as inflation concerns remain high, a flatter yield curve shouldn’t in itself be a sign of looming disaster at this stage of the rates cycle.

The 5/30 year spread typically narrows in the run-up to the Fed raising interest rates, and that gap isn’t currently too far away from levels in similar circumstances over the past 30 years.

So far today that bear-flattening is continuing with the front-end of the curve up around 3bps and long-end yields down 1-2bps...

At 1.20%, that is the highest rate for 5Y yields since February 2020 as rate-hike expectations shift significantly more hawkish after a brief pause...

The market is now pricing in more than a full hike by Sept 2022 and 2 full hikes by Dec 2022.