Subadra Rajappa, head of U.S. rates strategy at Societe Generale, said the steepening of the U.S. Treasury yield curve is unusual because it’s driven by a sell-off in longer-dated Treasuries, which won‘t last in the current environment.
If the sell-off in long-term Treasuries continues, rising inflation expectations will eventually lead to market expectations of rate hikes, pushing short-term yields higher.
On the other hand, if the data falls short of expectations and short-term yields are pegged to Fed expectations, Treasuries will rebound and the curve will flatten.
Historically, a sustained steepening of the curve at the end of a rate hike cycle has tended to be a bullish steepening as the Fed prepares to adjust policy.
But with inflation high and sticky, “higher rates for longer” means the yield curve will slowly invert.
