Treasury Yield Curve Extends Flattening as Consumer Prices Surge

(Bloomberg) -- The Treasury yield curve flattened Tuesday as an above-forecast June consumer-price reading emboldened traders to bet that the Federal Reserve will tighten policy in early 2023.

The gap between 5- and 30-year yields narrowed to less than 115 basis points, pushing it toward the slimmest levels of 2021, reached last month.

Five-year yields rose to about 0.82%, up more than 20 basis points from mid-February levels, while 30-year yields fell. Money-market traders are penciling in Fed liftoff from near zero in early 2023 -- with implied rates on the contracts rising slightly Tuesday.

Consumer price readings surged last month by the most since 2008. That helped lift bond-market gauges of future price pressures. The 10-year breakeven rate, a market proxy for the average annual inflation rate over the next decade, rose as high as 2.37%, although it remains below an eight-year high reached in May. It ebbed from those highs after policy makers last month brought forward their median forecast for when they’d first lift rates, to 2023.

“A very important part of this print is that certainly we see some of the reopening-restart inflationary pressures coming through,” Kate Moore, head of thematic strategy at BlackRock Inc., said on Bloomberg television. “But there is also pressure in services.”

Unraveling Steepener Trade Heightens Focus on Fed-Liftoff Timing

Rates on the long bond were down about 2 basis points to 1.97%. All in all, the reaction to the data was in line with predictions from a swath of Wall Street forecasters who have recently flagged that the multi-year curve steepening trend is over.

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