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Markets

Yield curve steeper after Fed maintains bond-buying

  • The 10-year breakeven rate, which reflects investor expectations of inflation, rose to its highest since April 2019, last at 1.93%.
Published December 17, 2020

NEW YORK: The Treasury yield curve steepened slightly on Wednesday after the Federal Reserve at the conclusion of its monthly meeting said it would maintain its current bond-buying policy until significant progress in the US economic recovery is made.

Choppy trade at the long end of the yield curve ultimately left the benchmark 10-year yield roughly flat on the day, last at 0.920%. A move lower at the short end steepened the yield curve, with the spread between the two- and 10-year yield up 1 basis point to 79.9 basis points.

The majority of the Fed's purchases of Treasury debt since the start of the coronavirus pandemic have been in shorter maturities, which has helped keep yields at the short end of the curve low and has allowed the longer-dated yields to rise modestly. The continuation of that policy left the curve slightly steeper, on trend with the recent direction of the market.

"This was a very boring statement. For us, that's not too much of a surprise because we didn't really see the need for them to do too much more," said Collin Martin, fixed income strategist at the Schwab Center for Financial Research.

The yields on 10- and 30-year bonds have risen by roughly 60 and 100 basis points since they hit all-time lows in March. The increase sparked debate prior to Wednesday's statement on whether the Fed would purchase more longer-dated debt to cap yields and keep borrowing costs low.

That the Fed did not announce any changes to its bond-buying was largely in line with what the market had expected, though the modest steepening in the curve suggested some investors who were betting the central bank would increase its purchases of longer-dated bonds had unwound some positions.

The long end of the yield curve jumped by several basis points immediately after the statement was released, but later reversed the move when Fed Chair Jerome Powell at his press conference left the door open to increasing longer-dated Treasury purchases in the future.

With interest rates anchored at zero likely for years to come, the Fed added a more explicit promise to continue the current bond-buying program until there is "substantial further progress" in restoring full employment and hitting the 2% inflation target.

The yield on the 10-year Treasury Inflation-Protected Security fell to its lowest since September as investors bet on higher inflation. The 10-year breakeven rate, which reflects investor expectations of inflation, rose to its highest since April 2019, last at 1.93%.

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