The Big 2020 Yield-Curve Steepening Bet stumbles out of the gate



(Bloomberg) – It was a difficult start to the year for the bearish bond trader as investors withdrew into government bond security due to a sudden escalation of tensions between the US and Iran.

Benchmark yields fell on Friday, flattening the curve as the market digested the possible consequences of a US air strike that killed one of Iran's top generals. The Iranian promise of retaliation, which was based on the "shocking" approach to revenge for American sanctions threatened in North Korea on January 1, focuses on geopolitical concerns even before many investors have returned from the New Year holidays. Those who expected better economic news were disappointed with the worst US factory data since 2009.

The defensive turn is a blow to one of the most enticing trades of the past year – the Curve Steepener. Last month, the trend towards a broader curve seemed to be in full swing as the yield on 10-year US government bonds rose to its highest level in more than a year. Fans of the upward trend have used the improved global production data, the progress of a US-China trade agreement and increasing inflationary pressure as the basis for a sustainable trend. This yield gap traded 26 basis points on Friday, far from its reversal in August when fears of recession hit the market, but around 10 basis points lower than the year-end high.

Friday's production figures "were simply unbeatable," said Jim Bianco, president and founder of Bianco Research LLC. The curve can be "almost inverted" and that depends on two things: First, I don't think the data will get through. and secondly, the development of interest rates is lower. “He calls for the curve to flatten back to zero in the first half of this year, with the 10-year low approaching from 1.43% in 2019, compared to 1.8% now. In his view, this could lead to a key rate cut by the US Federal Reserve in the first half of the year. Options positions based on such a scenario have emerged this week.

Developments related to Iran should keep the markets busy in the coming week. Investors can also be distracted by what central bankers said this weekend at a conference of the American Economic Association in San Diego, among others, with panelists with former Fed chair Janet Yellen and current New York Fed president John Williams owned by global finance officials. They could give the risks outlined in the Fed's minutes from its December meeting released Friday a geopolitical focus that focused on uncertainty about international trade and the weakness of economic growth abroad.

The best opportunity to push yields back up could come early next week if recent reports on the US services sector show continued expansion. After the surprisingly high increase last month, the market is unlikely to have much to see after Friday's payroll report, which is expected to add around 160,000 jobs.

What to see

Traders will be on high alert if Iran responds to the US air attack. With regard to domestic publications, the monthly job report and metrics for the services sector are among the highlights of the coming week. The 2020 data schedule is in full swing: Jan 6: Markit services and composite PMIsJan. 7: trade balance; ISM Non Manufacturing Index; Factory, Durable Goods, and Capital Goods Orders Jan. 8: MBA mortgage applications; ADP employment; VerbraucherkreditJan. 9: Initial applications for unemployment benefits / continuation of unemployment benefits; Bloomberg consumer comfortJan. 10: Payroll, unemployment and average hourly wages; Wholesale Sales and Inventories Much of the next week's Fed peak will be concentrated on Thursday: Jan. 8: Governor Lael Brainard in WashingtonJan. 9: Vice President Richard Clarida speaks in New York; John Williams of the New York Fed at the Bank of England and Charles Evans of the Chicago Fed discuss the economic outlook in Milwaukee. James Bullard of the St. Louis Fed in Madison, Wisconsin. It's a full auction: Jan. 6:13 week bills worth $ 42 billion; $ 36 billion from 26-week bills. 7: $ 38 billion 3-year banknotes Jan. 8: $ 24 billion from 10-year banknotes. 9: 4 and 8 week calculations; $ 16 billion 30-year bonds

Contact the reporter about this story: Emily Barrett in New York at

Contact the editors responsible for this story: Benjamin Purvis at, Mark Tannenbaum, Nick Baker

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