After a brief hiatus, the yield curve resumed flattening recently. E.g., the 5-10 portion flattened a lot starting immediately after the hawkish June FOMC. It flattened again after the Sep FOMC, before re-steepening temporarily on term premium issues. Now flatter again. 1/5

3:13 PM ยท Oct 13, 2021

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Most of the flattening is attributable to expectations that the Fed will start hiking next year. The whole expected path for the FFR over the next few years moved up about 60 bps since the June FOMC meeting. The mkt thinks high inflation will cause the Fed to capitulate. 2/5
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Not surprisingly, oil prices have contributed to inflation fears. The expected funds rate two years ahead has moved in lockstep with oil since the June FOMC meeting. 3/5
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The September meeting has been detrimental to the market belief in the Fed's new framework too. After both the Jun and Sep meetings the market lifted expectations for near term hikes and pushed down expectations for the terminal rate: The opposite of what the Fed would want. 4/5
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Bottom line: As long as the market keeps not having faith in FAIT and keeps thinking that rate hikes are getting closer, the curve will remain under flattening pressure. 5/5
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