Traders are dialing back aggressive bets on how far the Federal Reserve will go in its inflation-fighting campaign, spurring big moves across the front-end of the U.S. bond market.
Expectations that consumer price pressures may have peaked after data releases this week triggered a near 20 basis-point decline in two-year Treasury yields relative to Monday levels, with large block trades seen in securities acutely sensitive to shifts in interest-rate policy.
That, coupled with selling pressure on longer-dated Treasuries amid auctions, steepened the yield curve by widening the gap between long and short-term rates. It’s a pronounced shift from the recession-flashing inversion seen earlier in the month, when 30-year yields slipped below those on 2-year notes.
“The regime shift narrative to higher rates has been exhausted and the terminal rate might be lower than previously thought,” said Ian Lyngen, head of interest rate strategy at BMO Capital Markets.
Read more: Big Short in Front-End Treasuries Axed, Sending Yields Tumbling
The consumer price index for March showed a modest moderation in core prices that may suggest a peak in broader inflation pressure. In the wake of the data, the swaps market has cut nearly a full quarter-point rate hike from its pricing from now until December meeting. Derivatives traders are pricing in around 2 percentage points of additional hikes into the December meeting, down from 2.2 percentage points at Monday’s close.