Interest rates continue to normalize, moving lower after the bout of inflation in 2021 and 2022, and now as signs of a slowing economy creep into the picture.
The result has been a steepening of the Treasury yield curve, with 2-year Treasury bond yields now below 3.70% as the forward markets anticipate two rate cuts by the Federal Reserve before the end of the year.
Get Joe Brusuelas’s Market Minute economic commentary every morning. Subscribe
A steeper yield curve will increase net interest margin at the banks, which underscores one of the two best market narratives—the other being tech—that figures to continue as investors push the front end lower in anticipation of rate cuts out of the Fed.
The yield on 2-year Treasury notes has dropped by 64 basis points since the end of the year while 10-year Treasury bond yields have dropped by 40 basis points from 4.63% to 4.23% in mid-August.
The change in sentiment regarding Fed policy has resulted in a steepening of the yield curve, with an increase in the 10-year/2-year yield spread from 2 basis points last November to 54 basis points.
While this steepening facilitates yield-curve strategies, borrowing in money-market rates out to 3 months remains on par with the 10-year yields.
We expect the Fed to remain on hold until the full effect of the tariffs on inflation becomes clearer, with the possibility of a Fed rate cut in December should the labor market show further deterioration.
