(Bloomberg) -- The Treasury yield curve steepened to the widest in two months after Federal Reserve Chairman Jerome Powell announced a shift to a more relaxed approach on inflation, emboldening traders to bet policy rates will remain locked near zero for even longer.
Powell detailed Thursday in a speech at the central bank’s Jackson Hole conference that the central bank will seek inflation that “averages” 2% over time. He said it was a move that reflects “our appreciation for the benefits of a strong labor market, particularly for many in low- and moderate-income communities.”
With shorter maturities outperforming, the Treasuries curve from 5 to 30 years reached almost 117 basis points, the biggest gap since June. The move adds to an overall steepening trend that’s pushed the spread up from as low as 94 basis points last month amid signs the economy is stabilizing from the pandemic. Anticipation of a change to the Fed’s inflation goal also fueled the trend.
This means that “the Fed will likely be on hold for even longer than people originally anticipated,” said Subadra Rajappa, head of U.S. rates strategy at Societe Generale.
A fixed-income measure of inflation expectations, dubbed the breakeven rate, initially dove following Powell’s comments, then rebounded. The 10-year breakeven trades at 1.73%, around the highest since January and up from as low as 0.47% in March.
The initial decline signaled traders anticipate that it will be difficult for the central bank to achieve its inflation goal, which it has been unable to consistently attain over the past five years. Some trades may also have sold after the run-up in inflation expectations in recent months.
“The concern even ahead of this announcement from Powell is how they are going to be able to credibly achieve the 2% inflation averaging given for years they haven’t been able to achieve 2% on a consistent basis,” Rajappa said.
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