Investors pulled $250m from Amundi’s US Curve Steepening ETF in August on fears the Federal Reserve would not deliver the expected interest rate cuts this year.
The Amundi US Curve Steepening 2-10Y UCITS ETF (STPU) saw net outflows as the 10-year yield rose above the two-year for the first time since July 2022.
Investors have been taking profits as the US yield curve has gone from deeply inverted to flat – in effect steepening – driving STPU’s strong performance of 6.9% between 30 June 2023 and 5 September 2024.
Chart 1: US yield curve disinverts
Source: Federal Reserve Bank of St. Louis, FRED database.
An inverted yield curve, where short-term bonds yields exceed longer-dated ones, has historically been one of the most reliable leading indicators of a recession.
It is shortly after the yield curve disinverts that the economy typically enters recession.
Were a recession to materialise in the coming months, the yield curve would be expected to steepen as the Federal Reserve cuts rates aggressively to stimulate the economy.
But the US economy has continued to demonstrate resilience, with the Atlanta Fed’s GDPNow model forecasting real GDP growth of 2.1% for Q3 as at 4 September.
The outflows suggest that investors are sceptical of the recession narrative and fear that the market is overestimating the quantity of rate cuts ahead.
As at 6 September, futures are pricing at least one cut at the 18 September meeting and more than four cuts by year end.
If the Fed do not deliver on these, there could upward pressure on the two-year yield creating losses for investors positioned for further steepening.
STPU, which tracks the Solactive USD Daily (x7) Steepener 2-10 index, offers leveraged long exposure to two-year US Treasuries and leveraged short exposure to 10-year US Treasuries via ultra-bond futures.
