Fed Cutting Rates and Steepener Trade

On September 18, 2024, the Federal Reserve cut its benchmark interest rate by 50 basis points, bringing the target range to 4.75%–5%. This marked a shift from the aggressive rate hikes that had been aimed at controlling high inflation, signaling the start of a potential easing cycle to support the economy amid slowing growth and an improving inflation outlook. The Fed indicated that inflation was moving closer to its 2% target, and it projected further rate cuts later in the year and into 2025 to support economic stability. 

Given this backdrop, the market is anticipating additional cuts, which could create a favorable environment for a bullish steepener trade. With the Fed's stance suggesting more easing, short-term bond yields will decrease more than long-term bond yields, leading to a steeper yield curve. By going long on 2-year Treasuries and shorting 10-year Treasuries, one can capitalize on this expected steepening, profiting from the widening spread as short-term yields decrease more aggressively due to continued rate cuts. After the 2-year treasure reaches maturity, one can either roll into a new 2-year treasury if the Fed might continue with rate cuts or one can close the entire steepener trade.