Opportunities in the front end of the US Yield Curve

The US economy has continued to expand for almost a decade, prompting policymakers at the US Fed to raise interest rates for the third time this year, to 2.25%. Moreover, a rising rate environment spurred by QT from the Fed and ECB could prompt more late-cycle signs, thus maintaining downward pressure on long-term bond yields, as financial conditions tighten. However, in such an environment, an apparent asymmetric risk and reward dynamic have made short-term bonds relatively more attractive to invest in currently. Thus, flattening of the yield curve often perceived as a harbinger presents opportunities in the front-end of the yield curve. Therefore, we suggest an active management strategy through, e.g., a bond ladder strategy in order to tap yield at the front end of the curve.

Analyst: Ck Soumaoro, MSc in Economics