TD Securities recommended buying three-year Treasuries at yields near 2.75 per cent, anticipating a decline to 2.25 per cent.

The thinking is that if tighter monetary policy - combined with pandemic containment measures and global fallout from Russia’s invasion of Ukraine - limit growth, the peak in rates may be lower and nearer than previously expected. Futures markets currently price in a peak of just over 3 per cent in mid-2023.

“It’s not clear what central banks will do when we’re left with little growth and inflation above target,” Faranello said.

Longer-dated yields continued to rise, with the benchmark 10-year note’s reaching a 2022 peak of 2.83 per cent. It collided with a downward-sloping trend line that’s contained it for a generation. For some, it was confirmation that the four-decade bull run in bonds is ending - aided by the Fed’s move to allow its portfolio to run off.

As the 30-year bond’s yield also reached its highest levels of the year on Thursday - 2.93 per cent - the yield curve steepened, reversing the powerful curve-flattening trend that has defined the market for the past 12 months.

The gap between two- and 10-year yields, which shrank from a 2021 peak near 162 basis points to -9.5 basis points on April 4 - with the two-year exceeding the 10-year for the first time since 2019, snapped back to 37 basis points.

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The five- to 30-year curve, which inverted on March 28 for the first time since 2006 and reached an extreme of -15.6bp on April 6, rebounded to 13 basis points.

“It is healthy to see a steeper, more normal-sloping curve after recent inversions,” said Jason Pride, chief investment officer of private wealth at Glenmede. “The Fed wants to push markets until there is a more negative reaction - especially in credit and equities - that slows the economy.”

Curve-flattening, which normally unfolds in anticipation of Fed rate hikes, began much sooner relative to the first hike than has occurred historically, putting traders on edge about when the trend-reversal might begin.

JPMorgan Chase & Co is among the Wall Street firms viewing the recent bout of steepening as merely an interruption. Its US interest-rate strategists recommended positioning for a flatter curve after the move. The call was based on anticipated pension-fund demand for long-maturity debt as well as limited impact from the Fed’s balance-sheet measures.

Bond traders are left expecting a more contested market in the weeks ahead. The stakes are high. The first quarter was the Treasury market’s worst ever, and the second is off to an inauspicious start.

Bloomberg

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