#03: The Long End Won't Behave
The 30-year is telling a different story to the Fed: term premium, supply indigestion, and what a steepening curve has historically meant for equity valuations.
DC Economics
The Federal Reserve spent the week talking about cuts, and the front end of the Treasury curve duly obliged. Two-year yields fell 9bp to 3.62% as futures markets moved to price an 84% chance of a September cut. The 30-year did precisely the opposite: up 14bp to 4.94%, its highest weekly close in more than two years.
That divergence — front end rallying, long end selling off — pushed the 10s30s spread out to 63bp, the steepest since early 2022. This is not the curve celebrating easier policy. It is the market charging more, in the form of term premium, to hold long-dated government paper in a world of 6%-of-GDP deficits and a heavy coupon calendar.
The proximate trigger was Thursday's 30-year auction, which was poor by any standard. The $22bn reopening tailed 3.4bp, the widest tail of this cycle, and primary dealers were left holding nearly a fifth of the paper. When the dealer community becomes the buyer of last resort, the market pays attention.