Front-End Yields Led This Steepening

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

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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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