Insurance AUM Journal column argues a flatter curve favors short duration

The 10-year Treasury yield climbed 80 basis points in the third quarter, closing just below 5.3% after starting just under 4.5%. The move took 10-year yields to their highest levels since 2007, according to a Treasury chart dated Sept. 29 that the column cites.

The 2-year yield is not much lower than the 10-year, and that gap is the basis of an argument published Oct. 13 by Insurance AUM Journal. The column says the curve is flattening, term premium on longer bonds is modest, and the shorter end offers particular value at present.

The column says short-dated yields trade more closely off the Fed's policy moves. Long-dated yields, it argues, do more work reflecting competition for capital — the column cites hyperscalers — along with inflation expectations and the strength of the economy overall.

If the market has priced more hikes than the Fed actually delivers, the column says the long end could stay elevated while the short end falls rapidly.

For a general account, shortening duration on a flat curve concedes little income. The column argues the short end can collect attractive yields while taking on far less duration risk, and that shorter duration could see much of the upside of a soft landing with less exposure than longer duration to stagflation risk.

Yields remain volatile with the start of the fourth quarter, the column says. It is difficult to say whether peaks have been reached because markets and the Fed will respond to data and events. It is too soon, in the column's words, to know with certainty whether the Fed is nearly done or has barely begun its rate-hiking cycle.

In September we argued Gundlach's hold call put the next duration decision on the long end of the curve, where a hold does the repricing, and that higher yields were lifting reinvestment rates on a shrinking stream of new premium money. In August we reported that a bear-flattening curve left agency MBS carry thin. The column's argument sits at the short end of that same curve.