Fed Sweeps Yield Curve Under the Rug – What Are They Trying to Hide?
A few weeks ago we reported the Fed was getting hawkish despite what they were calling “low inflation.”
In that article, we showed rates possibly being raised more than 4 times in 2019. But more importantly, we warned that anyone investing in the market should start preparing to expect the unexpected.
And right now, it looks like the Fed’s bizarre moves are continuing.
This time it involves the yield curve. The yield curve represents the difference in interest rate paid on short-term Treasury notes and long-term Treasury notes in the bond market.
A common signal of economic health from the bond market involves looking at the difference between the 2-year and 10-year rates (also called the “spread”).
Over the last three decades, when 2-year yields are lower than the 10-year bond yields, it signaled a healthy economic outlook.
But when that “spread” shrinks, the yield curve is said to be flattening. If it “reverses” entirely, the yield curve is inverted (or negative).
Since 1980, an inverted yield curve preceded an economic recession with reliable accuracy (see graph below, red arrows point to 3 recent events):
So the yield curve is a fairly reliable signal for imminent recession. And notice the downward trend of the yield curve on the right side of the graph. That indicates a flattening yield curve heading towards inversion.
And when we zoom in, the picture looks even more dire.
As of July 11th, 2018 the Treasury reported the difference between the 2-year and 10-year bonds to be 27 basis points (or .27% – see chart below).
This is the lowest spread since the 2008 Great Recession, and already much lower than the historical graph above.
There is no doubt the yield curve is flattening, and at an alarming pace.
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