The sharp steepening of the Treasury yield curve seen last week has been reversed with the Federal Reserve (Fed) squashing hopes of faster economic recovery in the US.
The spread between the 10- and two-year yields is currently hovering at 45 basis points, down 25 basis points on a week-to-date basis, having widened 23 basis points last week.
The widening or steepening of the yield curve was caused by last Friday’s stellar Nonfarm Payrolls report, which showed the economy added over two million jobs in May. The surge in jobs triggered speculation that the economy has bottomed out and could witness a V-shaped recovery.
The Fed, however, poured cold water over the optimism on Wednesday by stating the recovery may take years and interest rates will be held at record lows through 2022.
Essentially, the bond market has priced out prospects of faster economic recovery. The longer duration yields could continue to slide on expectations that the so-called yield-curve control is the next new thing the Fed will roll out to keep borrowing costs low.
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