Bank Of America: Steep Heights For The Curve Trade

Bank of America note that they have “offered caution on trading the UST market in curve steepeners, preferring instead to focus on the timing of duration longs. Our justification: the forwards seem easier to beat being outright long vs. in steepeners.”

• “We still hold this view. Over the next year the UST 2s10s curve is already pricing nearly 55bps of steepening while the 10Y is only pricing a rate decline of 5-10bps. To us, the forwards seem easier to beat on duration vs the curve.”
• “The divergence in curve vs duration pricing is likely rooted in (1) history (2) timing & magnitude of Fed rate cuts. The market is aware UST 2s10s curve inversions typically don't last long, usually due to quick recession onsets. The market also thinks the Fed is done hiking and will be cutting in May, with low likelihood of cuts by Dec '23.”
• “To beat the 2s10s forwards, rates will likely require a sharp deterioration in U.S. data or unprecedented fast build-up of long-dated term premium. We think both are unlikely. As a result, steepeners may be frustrated as Fed cuts continue to fade.”