Analysis-US Treasury yield curve shifts could be set-up for Jackson Hole unwind
By Davide Barbuscia and Carolina Mandl
NEW YORK (Reuters) — Recent shifts in the U.S. Treasury yield curve may indicate that market optimism around the economy could wane, with some investors looking at Federal Reserve Chair Jerome Powell's speech at an economic symposium on Friday as a potential trigger for a correction or rapid unwind in positions.
The yield curve comparing two-year with 10-year yields has been inverted on a continued basis for over a year, a reliable sign of a looming recession, but it has steepened in recent weeks because 10-year yields have been rising while shorter-dated ones have remained flat.
The so-called «bear steepening» suggests that the market expects high interest rates to no longer hurt the economy, with investors extending their horizon for how long the Fed will maintain its restrictive policy stance.
The move has coincided with rising market expectations for a so-called soft landing for the economy — a scenario in which the Fed curbs inflation without causing a recession.
In line with that trend, hedge funds' bearish bets on long-term U.S. Treasuries have built up over several weeks, with net short positions in 10-year U.S. Treasuries futures at their highest levels since the beginning of July, according to Commodity Futures Trading Commission data from last week. That has led to the risk of an unwind, some market participants say.
«The problem with crowded trades is that it is a bit like 100 elephants trying to squeeze through one door,» said Michael Harris, president of New York-based hedge fund Quest Partners, who sees the risk of the short bond position getting unwound. «It's not pretty.»
Some analysts warn that rising yields could push up borrowing costs, causing the economic
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