The Flat Yield Curve Supports Aggressive Tightening

The weekly charts below show the:
* US02-Yr Treasury (top).
* US10-Yr Treasury (middle).
* 10/02 Yield curve (bottom).

The spread between the 10/02 has declined to 0.371%. I.e., the yield curve has flattened remarkably since the middle of last year (red rectangle). The reason is the sharp increase in the US02-Yr (blue rectangle) vs. the shallower incline of the US10-Yr note (green rectangle). The steepness of the shorter maturity indicates that the market expects aggressive rate hikes from the Fed (central banks typically influence the front end of the curve). Moreover, while tensions at the Ukraine-Russian border intensify, the oil price has jumped by 23% since the beginning of the year, adding to inflationary pressures. Fed Funds futures currently indicate a 36% chance of a 50bps hike on 16 March. Aggressive tightening is a core risk to stock market valuations for 2022 and may lend support to the greenback.

Featured Image by krzysztof-m from Pixabay

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Russell Shor

Senior Market Specialist

Russell Shor joined FXCM in October 2017 as a Senior Market Specialist. He is a certified FMVA® and has an Honours Degree in Economics from the University of South Africa. Russell is a full member of the Society of Technical Analysts in the United Kingdom. With over 20 years of financial markets experience, his analysis is of a high standard and quality.

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