Treasury's Shift Sets Stage for Rate Cut and Bull Steepener

Secretary Bessent has initiated steps to address the Treasury's needs as outlined in a previous piece, 'What the Treasury Needs'. The move is seen as an indication that the US economy is beginning to shift, but it's not yet clear if this will be a sustained turn.

The initial impact of these changes will likely be a flattening of the yield curve and a decrease in real interest rates. This could lead to a decline in the value of the US dollar and an increase in gold prices without a significant rise in inflation expectations.

Forward inflation swaps have already begun to reflect this shift, with the 5y5INFSW rate decreasing on the first day.

The next step will be for Fed Chairman Kevin Warsh to cut interest rates at the next meeting, which would steepen the yield curve and potentially trigger a 'bull steepener' that could benefit long-term bond holders.