Why the Treasury Curve’s Got a New Groove
Forget what you thought you knew about the U.S. Treasury curve—things have started to steepen lately, and there’s a good reason why everyone’s talking about a September Fed cut while still worried about government spending.
What’s Happening Behind the Numbers?
- Fed’s Plan & Inflation: The Federal Reserve is looking to trim overnight rates, but inflation is still a little too high for the comfy 2% target. That means the central bank thinks it’s nudged inflation into the “target” zone even if the goal is a shade wider.
- Market Signals: The U.S. CPI this past month was cooler than expected, and the labour market showed signs of softness—exactly what the Fed is looking for before cutting rates.
- New York Times‑style Curve: The 2‑year vs. 30‑year spread has flipped for the first time since 2022, showing that long‑term rates are rising faster than short‑term rates.
Why Does It Matter?
The curve tells investors whether the economy is heating up or cooling down. When the curve is steep, expectations are that the Fed will be in a position to ease rates without sparking a runaway rally.
Double Trouble: Elections & Spending
- President Trump might win in November—if so, expect a wave of big‑ticket tax cuts and beefed‑up defence budgets.
- Long‑term debt could keep climbing because the Treasury’s “deficit spending” will not shut down, even if the GOP historically loves cutting taxes.
What If the Election Goes Upside‑Down?
We’re nine months away from the polls, so a change in the political party could tilt the curve again. Whether Biden re‑wins or a fresh face takes the seat, the headline is that fiscal policy could heighten the deficit, feeding the steepening.
Buying the Future: What the Markets See
- The Treasury curve will keep getting steeper as long as inflation expectations stay in check.
- The Fed’s “policy put” stays in place—policy makers can slide back rates if they need to.
- Stocks should keep the trend that steers them upward; any dips will be short‑lived because investors feel the market is still resilient.
- Central banks will keep buying a chunk of government debt—meaning that money is on the books longer than before COVID or the GFC.
- Volatility will calm down. The “put” protects the market from shocks.
Wrap‑Up
Bottom line: the Fed is expected to cut in September, and probably again in December. Government spending will rise, pumping more debt into the system. Investors can lean on the “policy put” to soften blows, but still should keep an eye on the curve and elections for the next move.
