Falling liquidity was one of the principal reasons behind our call for a flatter US yield
curve this year. Excess liquidity often drops towards the end of an expansion.
At the same time the relative demand for credit falls, while the central bank is reacting to
lagging economic data and is raising rates, leading to a flatter yield curve.

The yield curve has flattened for most of the year, down on net 45bps. However, the top-left
chart shows there may not be that much room left in this trade, certainly as far as liquidity
goes. Also, it is now a consensus trade. Overall, duration-weighted positioning in USTs
(according to CoT data) is neutral (top chart) but this belies an overall flattening that
speculators have on (bottom-left chart). Although we still think that short-term rates are
underpricing near-term Fed risk, positioning leaves the yield curve vulnerable to steepening
in the 2s10s and the 5s10s sectors. Moreover, a steepening in the yield curve would be
consistent with a rise in fixed-income volatility (bottom-right chart), which is close to all-time
lows (based on the MOVE index).

Source: Bloomberg, Macrobond and Variant Perception