An exchange traded note strategy that benefits from a steepening yield curve has capitalized on the U.S. Treasury yield curve hitting its steepest point in over a year as an improving growth outlook helped fuel rising inflation expectations.
The iPath US Treasury Steepener ETN (NYSEArca: STPP) has increased 3.1% over the past three months.
The specialized bond ETN tracks the steeping yield curve in the Treasuries market. The steepening curve reflects the rising spread between yields on short-term and long-term bonds. When the curve flattens, the gap is narrowing. STPP has performed well when the yield curve is steepening.
Specifically, the iPath US Treasury Steepener ETN tracks the returns of a notional rolling investment in U.S. Treasury note futures contracts. The level of the underlying Index is designed to increase in response to a “steepening” of the yield curve and to decrease in response to a “flattening” of the yield curve, according to iPath. The Index tracks the returns of a notional investment in a weighted “long” position in relation to 2-year Treasury futures contracts and a weighted “short” position in relation to 10-year Treasury futures contracts.
On Thursday, the 2- to 10-year spread peaked at 31 basis points, its widest level since October 2018, before slipping back as Treasuries rebounded, Bloomberg reports. The initial selling that sent yields rising came in response to global declines in sovereign debt that began during European trading hours.
Steepening Yield Curve
The steepening yield curve extends the sharp turnaround in the prior safe-haven trade in August that sent the curve into an inversion and fueled fears of an impending recession. The flattening yield curve and eventual inversion were driven by deepening worries over the global outlook amid escalating trade tensions between the U.S. and China, along with weak manufacturing data that exacerbated fears of a global slowdown.
However, in recent months, the Federal Reserve policy easing and improving economic figures have lifted sentiment and contributed to more risk-on investing.
“It’s a reflection of faith in the Fed that their 75 basis points of cuts will be sufficient to restoke inflation, at least to a degree,” Ben Jeffery, a strategist at BMO Capital Markets, told Bloomberg.
For more information on the fixed-income market, visit our bond ETFs category.