Macro

Soft-Landing Hints Boost 2024 Bond Trade, Fed Eyes Cuts

Recent economic data hints at a potential soft landing, reviving steepening Treasury yield curve trades amid rate cut anticipations.

By Athena Xu

5/15, 19:02 EDT
S&P 500
iShares 20+ Year Treasury Bond ETF
iShares 7-10 Year Treasury Bond ETF
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Key Takeaway

  • Signs of a US economic soft landing are boosting investor confidence in steeper Treasury yield curves, with recent data supporting the Fed's 2% inflation target.
  • April's slowing demand and easing consumer price growth, alongside Citi’s lowest economic surprise gauge since January 2023, suggest a shift towards more aggressive bond trading.
  • Fed Chair Powell's dismissal of rate hikes this year further encourages bets on curve steepening, despite previous data-driven setbacks.

Soft Landing Boosts Bond Trade

Recent US economic data suggests a potential soft landing, reviving hopes for a steeper Treasury yield curve. April's inflation and retail sales data indicate a slowing demand, a more balanced labor market, and a gradual easing of consumer price growth, despite persistent services inflation. Citi's US economic surprises gauge has dropped to its lowest since January 2023, signaling a shift in bond trading strategies towards anticipating rate cuts as growth slows. This shift is supported by Fed Chair Jerome Powell's mid-December hint at upcoming rate cuts, a sentiment echoed globally and backed by major Wall Street firms.

Market Reactions to Economic Indicators

The anticipation of a soft landing has led to a surge in risk assets, with Wall Street pushing stocks to all-time highs and bond yields falling. The S&P 500 recorded its 23rd closing record in 2024 following cooler consumer price index figures and expectations of Fed rate cuts possibly before the November presidential elections. Treasury two-year yields dropped about eight basis points to 4.73%, with Fed swaps indicating a faster pace of policy easing. This market optimism also affected the dollar, which fell against all G-10 peers, while crude futures and precious metals like silver saw price increases.

Challenges and Opportunities in Curve Trades

Despite the optimism, the steepening yield curve trade has faced setbacks, with unexpected strong non-farm payrolls and consumer price increases leading investors to adopt tactical trades. However, recent statements by Fed’s Powell dismissing rate hikes this year, alongside slowing inflation and job growth, have reassured investors about the steepening yield curve's viability. Bloomberg’s Economic Surprise Monitor notes a divergence between weakening soft data and strong hard data, a common pattern at economic cycle inflection points, suggesting that while curve steepening trades have faced challenges, the current economic trajectory may support them.