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Get Ready for a Steeper Yield Curve

Get Ready for a Steeper Yield Curve

Thoughts on the Market vor 1 Jahr

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Our Fixed Income Strategist Vishy Tirupattur explains how changes
in the yield curve are affecting markets such as insurance,
Treasury yields and mortgage rates.

Read more insights from Morgan Stanley.

----- Transcript -----

Vishy Tirupattur: Welcome to Thoughts on
the Market. I am Vishy Tirupattur, Morgan Stanley’s Chief Fixed
Income Strategist.

Today – How the shape of the yield curve has affected credit and
housing markets, and the risk of changes to the curve and its
implications.

It’s Tuesday, October 7th at 1pm in New York.

The shape of the yield curve plays a pivotal role in financial
markets. It influences everything from credit conditions to
housing and mortgage dynamics. And you’ve been hearing on this
show for some time about more Fed rate cuts coming. Our
economists expect 25 basis point rate cuts at the next three
meetings – that is October, December and January. And then two
more in April and July of next year.

What does this mean to the shape of the curve? Our high
conviction call has been that investors should position for a
steeper yield curve. Why does the curve matter? It’s not just a
macro signal. It’s a transmission mechanism that shapes pricing,
risk appetite, and sector flows.

Take life insurers, for example. A steeper curve has turbocharged
demand for fixed annuity products, which in turn drives flows
into spread assets like corporate and securitized credit.
Insurance demand has become a powerful technical in credit
markets.

This year’s steepening has been led by falling front-end yields.
For example, 2-year Treasuries are down about 60 basis points,
significantly outpacing the 40 basis point drop in 10-year yields
and just 5 basis point drop in 30-year yields. That front-end
move reflects shifting rate expectations and offers relief to
highly leveraged issuers who rely on short-term funding.

But longer-dated yields remain sticky, keeping all-in borrowing
costs elevated. That is good for insurers – and the sale of fixed
annuity products – but acts as a brake on overall issuance,
helping keep credit spreads tight despite macro
uncertainty.

That said, not all markets benefit. Mortgage rates, which track
longer yields more closely than the fed funds rate, have actually
risen 25 to 30 basis points since the easing cycle began in
September of 2024. That’s a headwind for affordability. While a
steeper curve may support lending and future housing supply, it’s
not helping today’s buyers. A flatter curve with lower long-end
yields would offer more meaningful relief—but that is clearly not
our base case.

Bottom line: Rate cuts matter, but the shape of the curve may
matter more. A steeper curve is a tailwind for credit but a
headwind for housing. And a reminder that not all markets move in
sync.

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