NEW YORK: Falling inflation expectations flattened the yield curve and pushed yield spreads to their lowest levels in months on Monday as investors continued to digest the Federal Reserve's hawkish turn at its policy meeting last week.
Economic projections released by the Fed on Wednesday showed that 11 of 18 policymakers expected at least two quarter-percentage-point interest rate hikes by the end of 2023.
The prospect of those sooner-than-expected moves have pushed short-term yields higher while keeping longer-duration yields in check as market fears of out-of-control inflation subside.
The yield curve spread between five-year notes and 30-year bonds hit 110.62 basis points, its lowest level since August 2020, before ticking back to 117.90.
The spread between two-year notes and 10-year Treasuries hit its lowest level since February before rising slightly to 121.71 basis points.
"By bringing forward rate hikes, the Fed is providing a material headwind not only for any inflation that might not prove transitory but also growth as well. Needless to say, such a hawkish pivot is likely to remain topical for weeks to come - a reality further reinforced by the lack of meaningful economic data over the next several sessions," said Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets.
Two-year yields were flat at 0.2543%, while 10-year yields edged higher to 1.4717%. The two-year yield hit 0.284%, its highest level since March 2020, on Friday. Bond yields rise as prices fall.
"It feels like the Fed's modest moves last week basically got them in line with where the street was already. The bond markets seem to agree with that, as the yield on the U.S. 10-year ended the week below 1.5%," said Arthur Hogan, chief market strategist at National Securities.
The question of how and when the U.S. central bank will start tapering its monetary support will likely hang over the bond market until the central bank's annual meeting at Jackson Hole, Wyoming in late August.
St. Louis Fed President James Bullard said that the Fed's methodical rundown of its bond purchases after the last economic crisis will likely not serve as a guide as to how it should proceed this time given a more volatile inflation environment and a booming economy.
New York Fed President John Williams is scheduled to speak later on Monday.