In our “out of the box” series, we aim at being ahead of the current consensus narrative and think of the next theme that could drive price action before anyone else has given it any noteworthy attention. This week we look at four reasons why the curve steepener is now the trend to watch!

There are four reasons for the USD curve steepening now:

1) The issuance profile will move towards longer durations
2) The BoJ decision has decreased Japanese incentives to buy USTs
3) The Manufacturing rebound will add to steepening pressures
4) Positioning is already loaded with duration

Reason 1: The issuance profile will move towards longer durations”

The quarterly refunding report (released on Monday) revealed that Jannet Yellen and the US Treasury intend on increasing the cash balance to $750bn by year-end compared to the current $550bn. The issuance for Q3 was revised up by almost $200bn and the US Treasury is soon no longer able to keep issuing a truck-load of bills as they hit the 20% bills to total outstanding cap shortly (currently at roughly 17%).

Chart 1: Bill issuance in size is soon no longer possible due to 20% cap