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BofA Question How Flat The Curve Can Go, Stick With Flatteners

US TSYS

Bank of America note that “the spot 2-/10-Year U.S. Tsy curve is currently the most inverted it has been since August 2000 at about -50 bps. We ask what the boundaries are for how inverted the curve could get. We think the answer ultimately comes down to how much higher the market can price the terminal rate. We find that an additional 50bps repricing higher in terminal would flatten the 2-/10-Year curve between 10-25bps depending on assumptions for how the rest of the curve adjusts.”

  • “Since the 70s most curve inversions have not exceeded 50bps. However, there is no natural limit on how inverted the 2s10s curve can go. The extent of inversion will depend on the terminal rate which will likely be a function of inflation. If inflation remains elevated and terminal is priced to 4% or higher (about a 50bps shock), we would not rule out the curve flattening by another 10-25bps to an inversion between 60-85bps. Risks of a hard landing will likely skew curves flatter as hikes near term will probably be viewed as needed cuts in the future. Should growth continue to remain strong while inflation surprises, the curve may continue to flatten but to a lesser extent with longer-dated tenors also supported. We still recommend clients hold curve flattening positions until inflation & employment data moderate, given possible further upward re-pricing of the terminal rate.”
MNI London Bureau | +44 0203-865-3809 | anthony.barton@marketnews.com
MNI London Bureau | +44 0203-865-3809 | anthony.barton@marketnews.com

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