The best way to play the Federal Reserve’s pivot toward monetary easing is to load up on shorter maturity debt that still provides a 4%-plus yield.

That’s the overarching sentiment in the Treasury market as the Fed — with inflation falling — gears up to lower rates and support a soft landing. Meanwhile, a chunk of the nearly $6 trillion parked in money-market mutual funds has new reason to move into Treasury notes as investors fear rates on cash-like investments could soon plunge.

Add to that a strong conviction that the economy may avoid the recession that was once seen as virtually inevitable, and investors’ lack of appetite for longer-term securities as they expect the yield curve to steepen back to its more typical upward slope. The consensus on Wall Street is clear: The two-year Treasury is the sweet spot on the yield curve, offering an attractive yield of around 4.4% that’s higher than any other maturity.

“The Fed gave us their 2024, 2025 expectations for where rates go, and they go lower,” said Lindsay Rosner, a portfolio manager at Goldman Sachs Asset Management. Investors should aim for “a mixture of two and fives,” she said, as “out the curve is not where we see much value.”

Long-term debt is set to underperform, as traders want to be compensated for the added risk they see embedded in these securities. Among their concerns: a continued onslaught of issuance to finance the persistently high US government deficit as well as tail risks that inflation could reignite next year.

It’s easy to see why the two-year note appeals from a look at the yield curve. It first inverted this cycle over a year-and-a half ago, resulting in long-term rates trading below those on debt with shorter tenors. A groundswell of investors is wagering it will flip back to a more usual pattern sometime next year. At present, the 10-year note yield is about 50 basis points below that on debt with two years to maturity. As recently as July, the gap stood at over 100 basis points.

Sixty-eight percent of respondents to Bloomberg’s Instant Markets Live Pulse survey after the Fed meeting predicted the curve would turn positive sometime in the second half of 2024 or thereafter. Meanwhile, 8% said that would happen in the first quarter and 24% in the second.

Big investors, including Jeffrey Gundlach at DoubleLine Capital LP, Bill Gross — Pacific Investment Management Co.’s former bond king — and billionaire investor Bill Ackman predict that the curve will disinvert. Gundlach says US 10-year yields will fall toward the low 3%-range next year, while Gross and Ackman believe a positive slope could surface by the end of 2024.

Fed policymakers on Wednesday penciled in no further interest-rate hikes and left the target range at between 5.25% to 5.5%. Officials’ quarterly projections also showed 75 basis points in cuts next year, with the federal funds rate dropping to 3.6% by the end of 2025. From there, it would decline to 2.9% a year later.

Brandywine Global Investment Management LLC is among the investors already positioning for that. “Cash is great and you should have been moving out the curve,” said portfolio manager Jack McIntyre. He prefers to “bypass 2 years and buy 5-years and further out,” because there is some risk around whether “the Fed is going to stick a soft landing.”

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