Research Briefing | Oct 19, 2023

Central banks on alert for any further curve bear steepening

We see the recent increase in term premia as explainable by the ongoing retreat of price insensitive foreign buyers, structurally lower banking sector holdings, the drag exerted by the Fed’s balance sheet reduction (QT) and a recent uptick in inflation expectations volatility.

What you will learn:

  • However, all past bear steepening moves at this late stage in the cycle have ended in recession, and a significant slowdown starting in early 2024 remains our core view.
  • We have increased our overall weight to duration in our tactical asset allocation stance, and within this we remain (modestly) overweight US duration ahead of the economic slowdown driven by subdued credit growth, a negative fiscal impulse and an increase in household savings.
  • Close to 2.5% long term real yields also offer inexpensive downside asset price protection and appropriate liability matching for LDI-driven funds.
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