Investors ramp up bets on steeper yield curve under Warsh-led Fed
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Investors are ramping up bets on higher long-dated Treasury yields and a steeper yield curve as incoming Federal Reserve Chair Kevin Warsh is expected to press for interest rate cuts while shrinking the U.S. central bank's balance sheet. Warsh's preference for a materially smaller Fed balance sheet, currently around $6.59 trillion, implies a withdrawal of meaningful government demand for Treasuries, a move which tightens financial conditions because the central bank is not providing liquidity to the market. Reduced Fed bond reinvestments and purchases expand the amount of Treasury supply in the market, which tends to lift long-dated yields - steepening the curve. "The main outcome of shrinking the balance sheet would be to have a yield curve that is more normally positively sloped as it was historically before all the intervention following the financial crisis," said Eric Kuby, chief investment officer at North Star ...