- The spread between the 30- and give-year yield widens to levels seen four years ago.
- Markets price in higher odds of Biden victory and a potential rise in inflation.
The US Treasury yield curve is steepening with markets pricing an electoral “blue sweep,” which could pave the way for a bigger inflation-boosting spending package.
As represented by the spread between the 30 and five-year treasury yields, the curve steepened or rose to 127 basis points last week. That was the highest level since November 2016.
The spread bottomed out near 25 basis points in July 2018 and has been rising ever since.
The odds are growing that Democrat Joe Biden will be the next president, and elections would result in a blue sweep – Democrats controlling both Congress’ chambers, i.e., House of Representatives and the Senate.
Biden’s spending plan would boost the US debt by $5.6 trillion, while President Trump’s plan would increase the debt by $4.95 trillion, the Committee for a Responsible Federal Budget (CRFB).
As such, with polls showing a higher probability of Biden victory, bond markets are factoring in higher inflation expectations by pushing longer duration yields higher.