LONDON: A widely watched section of the US Treasury yield curve flattened to its lowest levels in three months on Monday after hawkish comments by Atlanta Fed President Raphael Bostic over the weekend bolstered bets of aggressive policy tightening.
The Fed could supersize an interest rate increase to half a percentage point if inflation remains stubbornly high, Bostic told the Financial Times in an interview.
While money markets and leading Wall Street banks last week ramped up their expectations of Fed rate hikes to as many as five increases this year, a 50 bps hike in March remains a slim possibility despite the Fed's hawkish pivot.
The spread between the yield on 10- and 2-year US Treasury debt tightened to early November lows of 59 bps on Monday, extending a three-week flattening streak.
US yields slide on month-end demand; curve steepens
Spreads tightened almost 15 bps last week after the Fed indicated it was likely to raise rates in March, as widely expected, and reaffirmed plans to end its pandemic-era bond purchases that month before launching a significant reduction in its asset holdings.
Latest positioning data showed investors had ramped up their net short bets on US Treasuries to close to their highest levels since October.
On an outright basis, ten-year yields were broadly unchanged from Friday at 1.78% while two-year yields were 3 bps higher at 1.20%.
US data on Friday showed the core personal consumption expenditures (PCE) price index, the Fed's preferred inflation gauge, rose 4.9% year-on-year, the biggest increase in 39 years.
Despite the recent surge in bond yields, inflation-adjusted yields remain deeply entrenched in negative territory with investors expecting the tightening of financial conditions will not bring inflation closer to the Fed's 2% PCE target for the forseeable future.
"We believe that will continue to exert flattening pressure on the curve and only if inflation were to sharply surprise to the downside in the near term would the flattening pressure be alleviated," Barclays strategists said.