Debate over the Yield Curve: Is it Steepening or Flattening?

A recent Wall Street Journal story stated that “A flattening of the Treasury yield curve in 2017 is a worrying sign for investors banking on resurgent U.S. inflation and growth.”

by Mish

Let’s investigate starting with Hedgeye.

With stocks off all-time highs, there are a lot of bear market stories swirling around about how U.S. economic growth is faltering. One of these false narratives is about the classic economic cycle barometer, the yield curve (i.e. the US Treasury 10-year Yield minus the 2-year Yield).
The yield curve just registered its highest quarterly average in five quarters. So that’s just wrong.
BOTTOM LINE
As we’ve been saying for some time now, U.S. economic growth is accelerating. Expect the yield curve to continue to steepen, despite the false narratives being passed around bears.

Yield Curve Discussion

For starters, “i.e.” is latin for “id est” and means roughly “that is” while “e.g.” stands for “exempli gratia” which means “for example.”

The reference “i.e” is flat out wrong. The yield curve does not equate to the 10-year yield minus the 2-year yield or any other spread, but rather the overall curve of interest rates from overnight to 30-years.

The Hedgeye example pertains to the steepness of a portion of the curve, specifically the 2-10 spread, for a select period of time hand-picked to show steepening.

Let’s investigate other time periods and other spreads.

10-Year Minus 2-year

Is the spread steepening or flattening? The answer depends on your timeframe, but one would have to pick very peculiarly to conclusively say “up”.

10-Year Minus 3-Month

Is the spread steepening or flattening? The answer depends on your timeframe, but one would have to pick very peculiarly to conclusively say “up”.

30-Year Minus 3-Month

Is the spread steepening or flattening? The answer depends on your timeframe, but one would have to pick very peculiarly to conclusively say “up”.

Yield Curve Steepening or Flattening?

You can pick a time-frame and make nearly any claim you want. But what really makes sense?

Looking for Steepening? Here You Go!

Based on the allegedly steeping yield curve, Hedgeye made this statement: “As we’ve been saying for some time now, U.S. economic growth is accelerating. Expect the yield curve to continue to steepen, despite the false narratives being passed around bears.”

Steepening? Really?

Economic Growth Accelerating? Steepening Yield Curve Is Evidence?
Really???

The Allegedly “Accelerating” Economy

Real Bottom Line

  1. Depending on timeframe, one can claim whatever one wants in regards to the yield curve steepening whether it makes any practical sense or not.
  2. In practice, the curve often steepens most as the Fed fights recessions, hardly a sign of a strengthening economy.
  3. Watch the yield curve steepen sharply when the Fed halts hikes hoping to stave off the next recession.

My Guess for first quarter GDP is 0.6%. For discussion, please see Six GDP Estimates: ZeroHedge, Mish, GDPNow, Nowcast, ISM, Markit.

Mike “Mish” Shedlock

false