Challenges to My Flattening Curve Position

For the last couple of weeks, I've been suggesting a long bond position paired with a flattening curve position. See here and here for the initial case. So far, the trade hasn't done much. Rates are about unchanged and the curve is slightly flatter, but nothing to write home about. I've gotten some challenges to my view from clients, reader e-mails or twitter, so I thought it might be helpful to readers to hear some of the most common challenges.

What if inflation comes back?

A rebound in inflation is a distinct possibility: tight labor markets, rebounding global economies, etc. That could very easily result in rates generally being higher than they are now. However, this will not cause the curve to steepen. Yes, I know, I know, that's the classic move given higher inflation: a bear steepener (where longer-term rates rise faster than shorter-term rates). However, you only get that bear steepener if the Fed doesn't respond to the higher inflation by tightening policy. If the Fed sees nascent inflation pressure and steps up the pace of rate hikes in response, there is no reason for long-term rates to rise aggressively....598 more words left in this article. To read them, just click below and try Real Money FREE for 14 days.

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