Skip to content
Subscriber Only

Bond Market’s ‘Game of Chicken’ With Fed Is Set for a Reckoning

  • Unmoored 5-year yields roil classic form of reflation wager
  • Focus now turns to Fed’s March 17 decision, forecast updates
Record Sales of Dollar Bonds by Japan Prefectures Gather Steam
Photographer: Andrew Harrer/Bloomberg

Investors are again reassessing one of the bond market’s premier reflation trades -- the curve steepener -- as expectations for growth and inflation perk up at a clip that was hard to imagine just a few months ago.

Whereas back in December the thought was that the Federal Reserve might tamp down long-term Treasury yields, the issue now lies with shorter-dated ones -- 5-year rates. Yields on that maturity have become unmoored in recent weeks, surging amid speculation that the central bank will need to start a cycle of rate hikes perhaps a full year earlier than officials have indicated. That shift has roiled the outlook for a classic iteration of the reflation wager, a widening gap between 5- and 30-year yields, even as the narrative of a stimulus-fueled recovery has only gained momentum.