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Relentless Yield Curve Flattening

Most economists expect the Fed will hike at least twice more this year. If so, portions of the yield curve may invert.

Basis Point Spreads

  • 3-month to 1-year: 36
  • 1-year to 2-year: 23
  • 2-year to 3-year: 15:
  • 3-year to 5-year: 19
  • 5-year to 10-year: 16
  • 1--year to 30-year: 32

If the fed hikes twice more this year, with the one-year yield at 2.11 and the 3-month yield at 1.75, there is little room for anything but inversion or a nearly flat curve if rates on the long end fail to rise.

For discussion of the long bong trend, and Lacy Hunt's law of diminishing returns, please see Relentless Yield Curve Flattening.

Mike "Mish" Shedlock

The bond market sees the oncoming recession just beyond the horizon and is signalling "FED POLICY ERROR".

I'm in for the "long bong trend". The "Relentless Yield Curve Flattening" also means a relentless bid for long-dated treasuries. Any thoughts on why?

To fight the Fed or not? Return on capital, or return of it? Think I'll shorten to less than 5 years here and sit it out a while. Need a break.

Good luck to Lacy on that 20 Year D.

Maybe the Fed is buying "offing," or maybe they are intent on normalizing. Either way, the risk of continued tightening is there.

Because the "smart money" understands that short rates won't be going much higher before we are into the next recession and then there will be a "grab for yield" - ANY yield - and there likely won't be any. So best to grab it now and have a potential capital gain later also.

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