The Steepening Yield Curve

The Treasury will hold its latest auction for 3-Yr notes this morning, 10-Yr notes tomorrow and the long bond on Thursday. Traders are watching to see whether demand will continue to fall in anticipation of Fed tightening in the months ahead.

Over the past few weeks, demand for treasuries on the longer term end of the yield curve has fallen, driving yields even higher. The chart below depicts how the curve has changed over the past year.

A year ago, the long end of the curve was close to where it is now while the short end was higher, for a flatter curve. As the financial crisis grew and the Fed cut rates in the fall of 2008, the entire curve shifted downward. Now, as the dark black line shows, the longer term end of the curve has risen, while the short end remains at historic lows, giving a much steeper curve.

There is an expectation that inflation is ahead so demand for current long term treasuries has fallen. Many traders believe the 10-yr, which is yielding 3.852% as of 10:00 this morning, can hit 4% or higher.

Last Friday and into yesterday, we saw an upward push on the short end of the curve. However, so far today the yields have pulled back again.