(Bloomberg) -- A closely-watched metric in the Treasuries market is near its highest level in more than four years after a weak US jobs print collided with concern about the swollen budget deficit.
The extra yield investors demand to hold 10-year notes compared with their two-year counterparts hit 73.7 basis points this week, just shy of the 2022 high touched in April. While the so-called steepening move went into reverse Friday, strategists and investors say the road of travel is for a bigger gap from here.
Signs of weakness in the US job market on Thursday spurred traders to increase bets on Federal Reserve rate cuts this year. Yields on shorter-dated maturities — more sensitive to Fed policy expectations — tumbled the most since August, while those on long-dated tenors declined less. At the long end, investors continue to demand a higher premium given jitters around government spending and unpredictable US policymaking.
"The yield curve should be steeper," said Anshul Pradhan, head of US rates strategy at Barclays, saying he anticipates the gap between three- and 30-year Treasury yields will widen. "Markets should price in more cuts than they currently are."
Swaps markets point to the US Federal Reserve lowering its benchmark rate by June — a month after Chair Jerome Powell's term ends — and delivering a total of two to three quarter-point cuts in total this year. Investors are speculating that Kevin Warsh, President Trump's Fed chair nominee, will favor lower rates despite his hawkish reputation.
Metal Selloff
Thursday's moves were also turbocharged by a fierce selloff in metals and equities, which sent investors to Treasuries as a safe haven and further lowered yields at the short end. Friday saw some of that cautious positioning unwind, with yields ticking higher as concerns abated and stocks rebounded.
Laura Cooper, head of macro credit at Nuveen, expects the steepening will continue, saying it will be led by yields rising on longer-dated debt as investors focus on sticky inflation and hefty US borrowing plans.
"Upside inflation risks remain," she said, adding that she continues to favor exposure to short-duration Treasuries. "Fiscal dynamics are likely to keep term premium elevated."
With Friday's non-farm payrolls data delayed by the partial government shutdown, rates traders will be looking to the rescheduled release on Feb. 11 for the next major catalyst.
"Markets overreacted to the labor data yesterday," said Fredrik Repton, senior portfolio manager at Neuberger Berman, adding that the JOLTS data tends to be volatile. "On the other hand, I do not believe Warsh will be as hawkish as some expect. Net-net, I can see the curve steepening a bit more."
--With assistance from Masaki Kondo.
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