Highly regarded by major banks, sparking market discussions! This is probably the most important deal in the second half of the year

Wall Street's major banks collectively stated that the normalization of the US yield curve - a steeper slope - will be the most important trade in the second half of this year.

The banks' reasoning is mainly based on two factors: the US presidential election and the Fed rate cuts.

Analysts pointed out that President Biden's poor performance in the first debate on June 27 seemed to pave the way for Trump's return to the White House.

After the first debate, a so-called "Trump trade" emerged on Wall Street, with expectations that the tariffs, immigration, and deficit policies imposed by the Republicans would drive up long-term US bond yields. Strategists from banks such as Citigroup, JP Morgan, and Morgan Stanley are optimistic about this trade.

On Friday, the non-farm payroll report released new signals of a cooling job market, boosting expectations of a Fed rate cut later this year, which further favored the trade - causing a significant drop in short-term yields.

It is worth noting that after the non-farm payroll report was released, a closely watched yield curve indicator - the spread between 5-year and 30-year US Treasury yields - reached its highest level since February this year.

Considering that loose monetary policy is seen as the main driver of yield curve normalization, the market closely watched the CPI data released on Thursday to find more concrete evidence of inflation slowing down, a key factor supporting Fed rate cuts.

Wall Street expects that the year-on-year growth rate of US CPI in June is expected to hit the smallest record since January this year. The Fed has always stated that it needs to see more definite evidence of inflation decline before cutting rates, and the June CPI data may to some extent dispel the Fed's concerns.

"Considering inflation and fiscal policy factors, the yield curve may continue to steepen," said Cindy Beaulieu, Chief Investment Officer for Conning North America.

Although the election has reignited market interest in the normalization of the yield curve, achieving a more sustainable market trend will require a significant rate cut by the Fed. Analysts suggest that if the Fed cuts rates significantly, the decline in short-term US bond yields is expected to exceed that of long-term bonds, leading to a phenomenon known as "bull steepening".

TD Securities expects that by the end of the year, the spread between 5-year and 30-year US Treasury yields will double from the current level, reaching 100 basis points, a prediction the bank has maintained since last year