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Traders are placing bets on the U.S. government bond yield curve to steepen ahead of the conclusion of the Federal Reserve’s two-day meeting on Wednesday, even as global growth fears keep interest rates capped. Perhaps more so than economic optimism, analysts said such wagers could partly reflect short-term trading strategies around expectations for the Fed to signal tweaks to the central bank’s balance sheet runoff process. Traders are simultaneously buying short-dated bonds and selling their longer-dated peers to profit from an early end to the Fed’s normalization of its $4 trillion portfolio this year, which could widen the spread between short-dated yields and long-dated yields, an indicator of the yield curve’s slope.
Another round of lackluster inflation data on Tuesday helped affirm suspicions that the Federal Reserve is now a peripheral player in the bond market. Expectations for shifts in U.S. central bank policy usually dictate where Treasury yields are headed.
Market analysts and fund managers fear "fundamental economic deterioration" could be headed for the U.S. in 2019 and the stock market could suffer.
The bond market is beginning to sound the alarm of a recession, with an inversion in U.S. Treasury yields occurring on Monday for the first time since 2007. The yield on the 5-year Treasury note fell below the yield on the 3-year note, meaning that investors were being paid more to hold U.S. government debt maturing in three years than comparable bonds maturing in five years. It’s not the major curve inversion that investors watch for — the 2-year note holding a higher yield than the 10-year note, which has preceded every U.S. recession since World War II — but it portends that the market is headed in that direction, analysts told Yahoo Finance.
As the U.S. Treasury yield curve gets flatter, many see a recession starting to appear. The question seems to be when rather than if it will happen.