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Why Yield Curve Steepening Could Be Short-Lived

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Bond market yields rise above February peak

The US bond markets were under pressure as the yield curve continued flattening until Wednesday last week. The yield spread between the two-year and ten-year reached a decade low of 41 basis points on Wednesday, but a rebound in commodity prices triggered higher inflation expectations and led to the sharp rally of US bond yields last week. The Vanguard Total Bond Market (BND) ETF, which tracks the performance of the bond markets, ended the previous week at 79.02, a fall of 0.77% for the week ending April 20.

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Bond market performance and speculator positions

For the week ending April 20, the ten-year yield (IEF) closed at 3.0%, an appreciation of 14 basis points. The two-year yield (SHY) closed at 2.5%, up by ten basis points. The longer-term 30-year yield (TLT) closed at 3.1%, up by 12 basis points.

According to the latest commitment of traders report, released on April 20 by the Chicago Futures Trading Commission, speculator short positions increased last week. The total net bearish positions as of Tuesday, April 17, rose 41,046 contracts from 330,635 contracts to 371,681 contracts.

The week ahead for the bond markets 

The sharp increase in bond (BSV) yields could face resistance this week as the US Treasury is scheduled to flood the market with a combined auction of $96 billion two-year, five-year, and seven-year notes. This was the largest issue of Treasury notes in the last three years. The US Treasury will release financial estimates for this quarter and upcoming quarter, which could expose the debt trap that the US is heading into and impact market sentiment. A higher supply could force the yield curve to flatten again, making this recent respite a very short one.

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