The front part of the US yield curve is not done The front part of the US yield curve is not done The front part of the US yield curve is not done

The front part of the US yield curve is not done

Althea Spinozzi

Head of Fixed Income Strategy

Summary:  Powell succeeded in calming and unnerved bond market. However, yesterday's 2-year US Treasury auction was disappointing following the 5bps hike in IOER/RRP rate. It leads us to believe that today and tomorrow 5-, and 7-year auctions might be vulnerable to investors' demand ahead of the personal consumption data. The divergence between the bond market and eurodollar futures reveals that yields in the front part of the yield curve are poised to rise much higher.

The market has all the reasons to take the Federal Reserve with a pinch of salt. Powell announced that the central bank would start talking about tapering, despite rejecting the idea entirely until last week. Additionally, he hiked the IOER/RRP rate by 5bps in a move branded as "technical" at the same meeting.

The actions of the Fed speak more than a thousand words. Although the Fed is in complete denial, it did hike interest rates last week. The abrupt bear-flattening of the yield curve indicated that the move was not priced in by investors as they stuck to the Fed’s dovish communications. It seems that the market is committing the same mistake all over again. Following the speeches of Mester, Williams and Powell's testimony to Congress, investors are ready to believe in whatever the Fed says to them blindly.

What could have been a nasty 2-year auction turned out to be just disappointing, with the yield tailing 0.05bps, the biggest since July 2020. Foreign investors demand dropped considerably from last month’s 57.1% to 50.6%. Yet, weak bidding metrics failed to move the market in a sign that the bond market buys into the Fed's message despite last week's massive reversal. We see a divergence in expectations between the bond market and eurodollar futures. The latter suggests a rate hike by the end of 2022, while the bond market discounts only a 2023 rate hike. A yield of 0.50%, double to what 2-year notes are offering now, would better indicate future rate hike expectations. However, it doesn't seem bond investors will move forwards until Federal Reserve becomes more hawkish.

The picture that the bond market is providing is quite pessimistic because it might reflect the expectations that the measures taken by the Federal Reserve to hike the IOER/RRP rate and to unwind its corporate bond portfolio gradually might be too much for the market to tolerate. Yet, the central bank raised growth and inflation forecasts signalling that more tightening might be needed. Thus, although things can change quickly after summer, we might still be facing a calm summer ahead with 10-year yields trading rangebound amid lower liquidity.

Don’t get too comfortable yet: this week's personal consumption data may still shake up things. The PCE Index is the favourite inflation indicator of the federal reserve. It is expected to rise to 3.4% from 3.1% YoY in May, which would be the highest reading since 1991. The belly of the curve will be most vulnerable to any surprise, and today and tomorrow's 5- and 7-year US Treasury auctions might provide insight into how investors are positioning ahead of this data.

The belly of the curve has suffered from weak demand for almost a year now. During the latest 5-year US Treasury auction in May, we saw the bid-to-cover ratio rising above the five year average for the first time since August, signalling improved demand for these securities. Yet, the higher demand might have been caused by leakage of liquidity from money markets. Today it will be crucial to see if demand deteriorates following the 5bps rate hike in IOER/RRP. Suppose the bid-to-cover ratio were to fall again below the 5-year average. In that case, it might mean that the rate hikes in the money market are drying liquidity up on the front part of the yield curve, making it more vulnerable to inflation surprises. Thus, tomorrow's 7-year auction could be more volatile and moving markets substantially. Although we have seen demand for 7-year notes improving since their dreadful auction back in February, the bid-to-cover remains well below the five-year average
Source: Bloomberg and Saxo Group.


The Saxo Group entities each provide execution-only service, and access to analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Inspiration Disclaimer and (v) Notices applying to Trade Inspiration, Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular, no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (
Full disclaimer (

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Markets or its affiliates.

Saxo Markets
88 Market Street
CapitaSpring #31-01
Singapore 048948

Contact Saxo

Select region


Saxo Capital Markets Pte Ltd ('Saxo Markets') is a company authorised and regulated by the Monetary Authority of Singapore (MAS) [Co. Reg. No.: 200601141M ] and is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms & Risk Warning to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as Margin FX products may result in your losses exceeding your initial deposits. Saxo Markets does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Markets does not take into account an individual’s needs, objectives or financial situation.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website are not intended for residents of the United States, Malaysia and Japan. Please click here to view our full disclaimer.

This advertisement has not been reviewed by the Monetary Authority of Singapore.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.