Question

What is the shape of the current Yield Curve as of July 2020?

Answer 1

At present the 2y yield in the US is close to 0.15%, 10y is close to 0.65% and 30y is close to 1.35%. The sovereign yield curve in the case of US is therefore upward sloping. The US treasury has increased issuances in the farther end of the curve (i.e. it has increased issuances of bonds with longer maturities thereby increasing the supply at the far end) which is one of the reason that has kept fartther end of the yield curve elevated and has led to the curve steepening.

The US Fed is committed to keeping the overnight Federal Funds rate low until 2022 and this would probably anchor near term rates. However farther end of the curve has steepend with gradual reopening of the economy and build up in inflation expectations (Reflationary trades). The 5y5y breakevens (inflation expectations) have risen. Market probably sees the current ultra accommodative monetary policy as temporary (until 2022) post which the hike cycle can resume. This could explain an upward sloping yield curve.

The Federal Reserve is however considering implementing yield curve control like the Bank of Japan under which it would set targets for yields for specific parts of the curve. More clarity on this awaited and could possibly come out in the next couple of FOMCs