It seems like no one is talking about the yield curve any more. During the last week of March, when the 10-2 year treasury spread inverted very briefly, roughly 3,800 news articles mentioning the yield curve appeared on Bloomberg (and we wrote our fair share on the subject). Last week, there were only about 1,000 such articles. Perhaps it’s because the curve has been stuck in a relatively narrow range for the past two months. I guess “Yield Curve Goes Nowhere Again” is not exactly an attention-grabbing headline, but perhaps it should be. Since March, the Fed has hiked rates by 75 bps, and the market expects them to hike rates again by 50 bps next week and by another 50 bps next month. Given such aggressive pace of tightening, the fact that the yield curve hasn’t gone anywhere is remarkable, and it is very good news for the economy and the stock market.
As we have noted before, the economy can handle a moderately flat yield curve just fine. It is only when the yield curve inverts that the economy significantly slows down and the stock market runs into trouble. In order to engineer a so-called soft landing, the Fed has to walk a fine line between hiking rates just enough to rein in inflation but not enough to cause a recession. The longer the yield curve remains moderately flat, the higher the chances that they will be successful.
Sauro Locatelli CFA, FRM™, SCR™
Director of Quantitative Research
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