(Bloomberg) -- The “no landing” scenario – a situation where the US economy keeps growing, inflation reignites and the Federal Reserve has little room to cut...
-- The “no landing” scenario – a situation where the US economy keeps growing, inflation reignites and the Federal Reserve has little room to cut interest rates – had largely disappeared as a bond-market talking point in recent months.
Much of the recent market debate had centered on whether the economy would be able to achieve the “soft landing” of deceleration without recession, or veer into the “hard landing” of a severe downturn. The Fed itself had signaled a shift in focus toward preventing a deterioration in the job market after fighting inflation for more than two years, and its pivot to rate cuts began with a half-point bang in September.
Meanwhile, inflation concerns are reviving after crude oil surged. The 10-year breakeven rate, a measure of bond traders’ inflation expectations, reached a two-month high, rebounding from a three-year low in mid-September. That’s ahead of key data on consumer prices due next week. The shifting narrative also upended a recent popular strategy to bet on aggressive Fed easing: so-called curve steepening. In such a strategy, traders wager short-term notes would outperform longer-maturity debt. Instead, two-year yields jumped 36 basis points last week, the most since June 2022. At 3.9%, the two-year yields are only 6 basis points below 10-year notes, narrowing from 22 basis points in late September.
She said she took advantage of Friday’s selloff to purchase more two- and five-year notes, adding to a curve-steepener position. “The reignition of inflation fears could keep the Fed from cutting,” but that would raise the risk for the Fed to keep borrowing costs “too high for too long and in the end cause a larger downturn.”Oct. 8: NFIB small business optimism; trade balanceOct. 10: Consumer price index; initial jobless claimsOct.
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