Expansion's steepest US yield gap prevails in forwards show

The gap between longer-term US government bond yields and shorter maturities is the steepest ever during this point of an economic recovery, a sign the Federal Reserve will be in no rush to reverse record monetary stimulus when it stops buying Treasuries next month.

The difference in yields between 2- and 5-year maturities as well as 2- and 10-year debt both now and projected for three- and six-months in the future are above the averages in instances when the Fed held interest rates steady, manufacturing was expanding and inflation less than 2 per cent. That's according to an analysis of interest-rate swaps by Deutsche Bank AG, one of the 20 primary dealers of US debt that trade with the Fed.

Fed Bank of New York President William C Dudley indicated last week that keeping borrowing costs low and the so-called yield curve steep should help the recovery after higher energy prices last quarter curbed consumers spending and growth. The difference between short- and longer-term rates may buttress equities and support banks, which profit by borrowing at Fed rates near zero and lending at higher rates.

“The things that would make investors worry about bonds, like commodity prices and economic growth, are all going down,” said Jeffrey Gundlach, the founder of DoubleLine Capital LP in Los Angeles, which has $11 billion in assets under management.