The Big Bond Steepener Is Flopping as the Fed Delays Rate Cuts

What was supposed to be the darling trade of 2024 has unraveled, thanks to the Federal Reserve upending predictions over how fast it would lower interest rates.

The market entered January aggressively betting on sharp rate cuts. By doing so, traders looked to profit from the US Treasury yield curve returning to a traditional upward slope, a transition known as a steepener. That would put longer-dated yields back above their short-term equivalents, reflecting the usual need to be compensated for risk over time.

Bill Gross, the co-founder of bond giant Pacific Investment Management Co., has been assuming such steepening would occur for nearly two years. When Goldman Sachs Asset Management rolled out its 2024 investment outlook, it declared the steepener, or the return to normality, the “easiest trade out there in rates.”

Such calls have backfired as short-term yields went even further above long-term ones as a resilient economy and sticky inflation led Fed officials to push back hard against market speculation cuts would begin in March.

Now, traders see the Fed’s first shift coming in June or possibly July, with total rate reductions for all of 2024 adding up to just slightly more than three-quarters of a percentage point. Those dynamics served as a headwind to the steepener trade, prompting a market-wide rethink.