Yield Curve Steepens as 10-Year Jumps to 2007 High

Rates sell off significantly in FOMC hangover. The long end of the swap and UST yield curve climbed dramatically today as speculation of only two rate cuts in 2024 continued. The 10-year UST yield rose 10bps and closed at 4.53%, the highest level since 2007. The 2s10s inversion shrank to 60bps after the 2y yield closed at 5.13%, the tightest gap since May. Meanwhile, the dollar continued its rally on the higher rate sentiment, as the Bloomberg Dollar Spot Index reached a level not matched since December. 

Moody’s warns of government shutdown risk. With less than a week before funding runs out, Congress has yet to pass a short-term spending bill to keep the U.S. government open past October 1st. Moody’s, the only major credit rating firm to still assign the U.S. a top rating, indicated today that a shutdown could signal governance weakness. Moody’s analysts wrote that even though debt payments would continue, and a short-term shutdown will have little economic impact, it would show the weakness of U.S. fiscal policymaking compared to other Aaa-rated countries. These remarks come after Fitch downgraded the U.S. in August on similar concerns.

Fed voter Goolsbee offers hawkish stance. The hawks have continued to fly in, and the Fed’s Goolsbee was the latest to suggest that rates could remain higher than expected. Goolsbee stated that interest rates will remain high “well into next year” and added “the risk of inflation staying higher than where we want it is the biggest risk.” He also hinted at the upcoming dynamic shift towards holding rates high versus raising them incrementally, as markets largely believe that only one more hike is left in the cycle.