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Steepening Treasury Curve Betrays a New View on the Fed

The selloff in the 30-year bond may indicate an expectation that the Fed will ease.

Part of the Treasury yield curve has undergone a dramatic shift in the past two days, in which the 30-year bond's yield has moved decisively above the 10-year note's yield.

To be sure, the move is being driven in part by factors that have little or nothing to do with anyone's point of view about the economy. But a move of this magnitude generally means that some investors are changing their minds about the likely future course of interest rates.

Today's shift in yields is steepening the 10- to 30-year portion of the Treasury yield curve. In other words, the 30-year bond's yield, which since mid-January had been lower than the 10-year note's yield, is once again higher.

This is potentially significant because a steepening of the Treasury yield curve generally means that bond investors expect the

Federal Reserve to cut interest rates to stimulate the economy.

Mark Mahoney, Treasury market strategist at

UBS Warburg

, noted that "a huge retail trade out of

30-year bonds and into

five-year notes" had occurred today. "The implication is that the next Fed move is an ease -- that's the only reason you would do that trade."

The economic data that were released today do not support that conclusion. Factoring in the revisions to July, the August

retail sales


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definition |

chart |


) report was strong. And while the August

Producer Price Index


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) showed falling prices at the wholesale level, the more recent sharp rise in oil prices will contribute to higher inflation this month.

Also, the selloff in the 30-year Treasury bond -- lately down more than a full point, boosting its yield 8 basis points to 5.81% -- is accelerated by the fact that corporate bond issuers are very active this week, selling a large quantity of bonds, including some 30-year issues. That can trigger selling of similar-maturity Treasuries by underwriters, investors or both, and in the 30-year bond, where liquidity is often poor, large sales can cause large price changes.

Still, with England running out of gas and ideas forming about what the eventual impact on global growth might be, a move of this kind in the bond market looks eerily fundamental at some level.

As Mahoney puts it: "It's as if the economy is unwinding and nobody knows it."