Inside Markets — Curve Steepening

The yield curve steepening over the last few sessions has decoupled from levels implied by terminal Fed rate expectations. This is also happening during a heavy weak of short-duration Treasury supply that should bias the curve toward flattening. Outsized fiscal spending over the last three years has distorted many market-based signals on the economy but the current pace/magnitude of curve steepening is usually what happens at the start of a recession.

Internal price action isn’t fully aligned with a risk-on dynamic. ‘Beta’ or relative volatility is the only equity factor that has broadly outperformed since last week’s Fed rate cut. The ‘value’ factor which is typically associated with risk-on markets and curve steepening has been fairly subdued, while factors associated with defensive positioning like ‘quality’ have continued their uptrend. Outside of traditional equity factors, we see strength in inflation beneficiaries, which deserves close attention in the days/weeks ahead.