The Bull Steepener Trade Takes Shape
The type of curve-steepener trade that is likely to prevail in 2024 is called a bull steepener, as detailed by BMO Capital Markets strategists Ian Lyngen and Ben Jeffery. In this scenario, short-term yields decline at a faster rate than long-term rates, potentially driven by continued expectations of between three and seven rate cuts of a quarter-point each by the Fed in 2024.
“In the year ahead, investors across financial markets will be focused on timing the Fed’s first rate cut as Powell begins the process of gradually returning policy rates to neutral. Curve steepening will once again be the macro trade of the year; only instead of the bear steepening seen in 2023, a cyclical bull steepener will be on offer,” Lyngen and Jeffery wrote in a note on Monday.
Selecting the entry point and timing for this move presents a significant challenge for the trade. Given the Fed’s rhetoric of extended higher rates, the anticipated steepening is likely to occur in the middle of the year rather than the first quarter, as the market eagerly priced in rate cuts.
“We expect that when the Fed eventually reduces the target range, it will occur later than investors anticipate, and the first cut will be of the ‘fine-tuning’ quarter-point variety,” the strategists noted, referring to the current fed-funds rate target range of 5.25% to 5.5%.
While the 5s30s spread, a closely monitored part of the bond market, has remained above zero for nearly three consecutive months, more than 40 different parts of the Treasury curve continue to show inversion, with negative spreads between shorter- and longer-term rates.
In Monday’s New York session, Treasury yields closed higher overall, with the 10-year and 30-year rates at approximately 3.96% and 4.07% respectively.