With the Independence Day holiday at the doors, markets will have reduced flows today and tomorrow. However, starting from Wednesday, liquidity will return to the US with the release of the FOMC minutes. Jobs data on Friday are critical ahead of the July Federal Reserve meeting, although we don't expect a slightly weaker reading to stop Powell from hiking again. Yet, a surprise on either side might move bond futures, which are now taking another rate hike for granted but struggling to price a second one.
We expect the yield curve to continue to bear-flatten throughout summer, led by the rise of front-term yields.
Today, the spread between 10-year and 2-year US Treasuries broke below March lows, falling to -110 basis points in the morning for the first time since 1981.
The US yield curve will continue to invert for a straightforward reason: short-term yields will likely surge to catch up with the DOT plot and as markets push further down the line expectations of a rate cut.
Long-term yields still have room to move slowly upward if the economy remains resilient; otherwise, they will drop if a recession is forecasted. Either way, the yield curve is meant to flatten, and it could continue to invert to test the 1981 low of -154bps.