Thursday, April 19, 2018

Yield curve now virtually flat as difference between 10 year and 30 year below 20 bps

While the financial pundits continue to jawbone about the ongoing trade war, how great earnings are, and even that stocks have remained 'undervalued', very little is being said about the dwindling difference between the 10 and 30 year bond yields.  And perhaps it is because what this flattening forecasts is something the talking heads don't want to discuss in their narratives, and especially what they don't want their viewers to know.

As of April 19 the Yield Curve (difference between the 10 and 30 year bond yields) has fallen to less than 20 bps difference.  And in every instance in the economic cycle that the curve flattens completely or subsequently becomes inverted (10 year yields go higher than the 30 year yields), it has automatically meant a recession.

10 year U.S. Treasury:


30 year U.S. Treasury:


Difference:  19.4 bps
Peter Cecchini, chief market strategist at Cantor Fitzgerald, calls it “the most important thing to have a clear idea about now.” Billionaire fund manager Bill Gross says we’re rapidly approaching a point at which the trend will induce an economic slowdown. Others claim it’s only natural, with the Federal Reserve raising short-term interest rates in the face of stubbornly low inflation. 
No matter which theory of flattening you subscribe to, the world’s biggest bond market is sending a signal that traders can’t ignore. The longer the trend continues, the more likely its effects could spread to bank earnings and the real economy, while at the same time it would limit the Fed’s ability to respond when these risks emerge. - Bloomberg

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