US economy

Treasury yield curve flattens as Fed cuts outlook


The Treasury yield curve flattening trade has new life as the long term Fed funds rate has been cut to 2.75 per cent from 3 per cent by the central bank.

A flatter curve and reduction in the outlook for the economy and inflation next year, has not been taken well by equities as the S&P 500 was up 1.5 per cent before erasing all of its gains. A slowing economy highlights the pressure on profits and margins as we enter 2019. Also playing a role is the FOMC’s expectation of two more rate tightenings next year.

“The main surprise was the retention of the ‘further gradual increases’ words, but the retention was offset by some tweaks to the wording suggesting less conviction,’’ noted Jim O’Sullivan, Chief US economist at High Frequency Economics.

The 10-year yield dipped below 2.80 per cent while the 30-year bond has fallen towards 3 per cent. Ian Lyngen at BMO Capital Markets says “we expect it will close sub-3.0% unless Powell somehow shifts the tone at the upcoming press conference . . . Stay tuned (as it were).”

After dipping into the red in the aftermath of the policy decision, the S&P 500 was up 0.6 per cent as investors waited Mr Powell’s post meeting conference.



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