Wall Street giants have spoken out collectively, saying that the normalization of the US yield curve — the slope has become steeper — will be the most important deal in the second half of this year.

Investment banks' reasons are mainly based on two things: the US election and the Federal Reserve's interest rate cut.

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

After the first debate, the so-called “Trump Deal” began on Wall Street, and it is expected that the tariffs, immigration, and deficit policies imposed by the Republican Party behind it will drive long-term US bond yields higher. Bank strategists such as Citibank, J.P. Morgan Chase, and Morgan Stanley are optimistic about this deal.

On Friday, the non-agricultural report released a new signal that the job market is cooling, boosting expectations that the Federal Reserve will cut interest rates during the year. The deal also ushered in a favorable situation — a sharp drop in short-term yields.

It is worth noting that after the release of the non-agricultural report, the interest rate spread between 5-year and 30-year US bonds, a much-publicized yield curve indicator, once reached a record high since February this year.

Considering that loose monetary policy is seen as the main driving force for the normalization of the yield curve, the market is closely watching the CPI data released this Thursday to find more definitive evidence of slowing inflation, which is a key factor supporting the Fed's interest rate cut.

Wall Street predicts that the year-on-year growth rate of the US CPI in June is expected to hit the smallest record since January this year. The Federal Reserve has always said that it needs to see more clear evidence of declining inflation before cutting interest rates, and the June CPI data may dispel the Fed's concerns to a certain extent.

“[The yield curve] may continue to be steep when considering inflation and fiscal policy factors,” said Cindy Beaulieu, chief investment officer at Conning North America.

Although the general election has rekindled the market's interest in normalizing the yield curve, to achieve a more lasting market, the Federal Reserve will need to cut interest rates drastically. Analysts said that if the Federal Reserve cuts interest rates sharply, it is expected to see short-term US bond yields fall more than long-term treasury bonds, leading to a “steep bull market.”

TD Securities predicts that by the end of the year, the spread between 5-year and 30-year US Treasury yields will quadruple to 100 basis points from now on. The bank has maintained this forecast since last year.