US: Bracing for gradual flattening in US Treasury yield curve – DBS Bank

Economists at DBS Bank share their thoughts on how to think about Federal Reserve policies and the implications on liquidity and curves. On Tuesday, Returns on 10-year US Treasury yields are at 1.44%, off their lows.

Taper and beyond

“The current Fed settings are keeping the UST curve flatter than it otherwise would have been. A clear roadmap for taper, which could be unveiled in August / September, could provide the impetus for longer-term yields to head slightly higher. At that point, the market could have also shaken off the summer lull. Note that we see steepening as a tactical countertrend move in 3Q, where 10Y US yields could pop back into the 1.5-2.0% range where we think normal should be.” 

“We have pivoted to an extended cyclical flattening stance post-June’s FOMC meeting. That view has not changed. There are no obvious triggers for steepening beyond taper and removal of the Delta variant risks. As Fed hikes draw closer and proceed, we expect the UST curve to flatten across multiple segments (2Y/10Y, 5Y/30Y) over a multi-year horizon.”