The yield curve and wage inflation moderation
The US 10/2s yields curve has flattened remarkably. The spread is 0.257%. At 0% the yield curve will be flat and if it drops below 0%, it will invert. In effect the spread between longer term notes is shrinking against the short-term instruments. This is partly due to the rate hiking cycle that the Fed is due to start on 16 March. The consensus is for a 25bps hike. However, the fact that the longer-term rates have not kept up with the short-end of the curve is a concern.
While the Fed influences the short-term notes, investor sentiment affects longer-term yields. Investors may interpret the lack of pace on the US10Y as a lack of enthusiasm for longer-term prospects. However, we introduce another speculative possibility. The wage inflation released today, along with the non-farm employment change, printed at 0% m/m against a forecast of 0.5% m/m. Moreover, last month's number was revised downwards from 0.7% m/m to 0.6% m/m. The annual increase of 5.13% was below the Dow Jones estimate of 5.8%. If there is a moderation in inflation expectations, the short-end may need to adjust, leading to a steeping of the curve. This relaxation may improve investor confidence for the future, leading to higher longer-term yields.
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Russell Shor
Senior Market Strategist
Russell Shor is a Senior Market Strategist at FXCM, having been promoted to the role in 2025 in recognition of his depth of insight and consistent delivery of high-impact market analysis. He originally joined FXCM in October 2017 as a Senior Market Specialist.
Russell holds an Honours Degree in Economics from the University of South Africa, is a certified FMVA®, and a full member of the Society of Technical Analysts (UK). With over 20 years of experience in financial markets, his work is renowned for its clarity, precision, and strategic value across asset classes.
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