OVERSEAS CASH
Curve flatteners are seen as likely to regain popularity in the long run due to a low inflation outlook and sturdy global demand for long-dated U.S. debt. In the short term, however, it may prove a choppy trade as investors gauge the bill's impact.
"It's hard to predict how the yield curve would behave in the short term. The biggest question is the timing and level of cash flows going to the government after tax reform," Canaccord's Reynolds said.
One factor is the mountain of corporate cash held overseas.
As part of the new tax code, U.S. multinational companies could bring back some of the estimated $2.6 trillion in business profits they have overseas and the Treasury Department could benefit from the taxes on the repatriated money.
Reynolds estimated the Treasury might receive as much as $225 billion in tax receipts in 2018 if the companies bring back all their overseas profits.
This means the government could issue fewer two- and three-year Treasury securities, pressuring these yields lower and steepening the yield curve into 2019, he said.
Independent government estimates suggest the tax plan could add at least $1 trillion to the $20 trillion in national debt in 10 years as the Treasury Department would ratchet up borrowing to compensate for shortfalls in tax receipts.
The degree to which the bill may spur both business investment and consumer spending, which could lift tax receipts and cap the rise in the deficit, is another key unknown for the shape of the yield curve going forward.
Still, the dominant view on Wall Street remains that the cut will provide only a short-term bump up in economic growth, and many analysts expect the longer-term curve-flattening trend to reassert itself in the year ahead.