A Rare Treasury Yield-Curve Trade Emerges After Fed Decision

(Bloomberg) -- The Federal Reserve’s interest-rate decision sparked a move in the U.S. yield curve that’s been virtually absent of late.

The spread between 5- and 30-year yields widened after the announcement to 33.6 basis points, the highest since April 27. Curve steepening is a rare enough occurrence -- it’s near the flattest levels in more than a decade amid bets on continued gradual Fed rate hikes. But it’s the manner of the steepening that’s striking.

The world’s biggest bond market experiences so-called bull steepening when shorter-term Treasuries rally to a greater extent than their longer-dated counterparts. Indeed, five-year yields fell as much as 1.7 basis points and two-year yields dropped 1.2 basis points. In contrast, 10-year yields were flat and those on the long bond rose.

Traders attributed the move in short-term yields to the Fed being less hawkish than anticipated after its preferred measure of inflation reached its 2 percent target this week for the first time since February 2017.

“If there was an expectation that the statement was going to be more hawkish and that the Fed was going to guide the market to expect three more rate hikes this year, I didn’t see it in the statement,” said Subadra Rajappa, head of U.S. rates strategy at Societe Generale.

©2018 Bloomberg L.P.

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