US bond yield curve to flatten and possibly invert this year: Standard Chartered

NEW YORK, Jan 31 (Reuters) – The market expects the U.S. Treasury yield curve to flatten completely by the middle of the year after the Federal Reserve raises interest rates, but the growth and could be reversed by the end of the year, said strategists at bank Standard Chartered.

The Fed’s aggressive stance has pushed up short-term rates, flattening the closely watched bond yield curve.

Currency managers and economists often view this narrowing of the spread between shorter-dated bond yields and those due in later years as a sign of concern about economic growth and uncertainty about monetary policy.

On Monday, the spread between 10-year and two-year Treasury yields narrowed to lows from early November following hawkish comments from Atlanta Fed President Raphael Bostic.

In their research note, Steve Englander and John Davies of Standard Chartered predict four rate hikes in a row, in March, May, June and July. That will mean a pause before the US midterm elections “will not look partisan,” they said.

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Englander and Davies raised their two-year yield forecast to 1.5% by the end of 2022 from 1.2%, but said the market will “increasingly question the resilience of growth in the second quarter and beyond, which will take to a completely flat curve between 2-year and 10-year bonds midway through the year.

Fed officials are monitoring the flattening of the yield curve but do not see its behavior as an “iron law” that predicts economic outcomes, Fed Chairman Jerome Powell said last week.

Englander and Davies noted that flattening pressure could ease after July as they expect the Fed to pause its hikes.

“However, given Powell’s view that the yield curve signals relative to downturn/recession risks are not ‘iron iron,’ we doubt the Fed’s messages or actions can prevent the curve between the two and the 10-years will dip into inverted territory by the end of the year,” they said.

(Reporting by Megan Davies; Spanish editing by Carlos Serrano)

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