us treasury yield curve inches nearer inversion
table top

6 December 2017


The US Treasuries yield curve may still be positively sloping in the way a healthy yield curve should, but on Wednesday movements at the ultra-long end led to a flattening not seen since the European sovereign debt crisis nearly a decade ago.


What is more, further flattening that leads to an inversion could be indicative of a recession in the world’s biggest economy, not a revival.


The yield curve was seen flattening at various junctions with the 2s10s have flattened by 33 basis points. Meanwhile, the maturity spread of 5s30s flattened by more than 35 basis points to just 58bps. That leaves the 5s30s spread at its narrowest since Septmber 2007, according to Reuters data.


The moves – the sharpest 30-day decline in the curve since 2008 – surpassed the September 2011 move incited by the European debt crisis, according to Citibank research this week.


On Wednesday, compressing longer-dated debt yields too a further knock towards inversion after the 30-year T-Bond yield dropped to 2.88pct – its lowest since October 24 – after US Treasury Secretary Steve Mnuchin was reported saying there was low demand for ultra-long bonds.


Although low demand should spell higher yields, markets appeared to be reading this as a crisis event, given that the Trump Administration is hoping to fund infrastructure investment ambitions with long-dated paper at a time when tax reforms could usurp fiscal revenues.

Source: Reuters
Source: Reuters

Events in the bond market are also being watched by other asset classes.


A research note on Wednesday from JP Morgan asked whether the yield curve flattening a problem for equities? The verdict was: Not yet, but reiterate last week's downgrade of Cyclical stocks.


With ongoing expectations of more Federal Reserve rate hikes to come in 2018 it is no surprise that interest rate-sensitive two-year Treasury yields have been rising.


JPM said the US 2-year yield reached the highest level since the financial crisis erupted in 2008, driving a significant flattening of the wider yield curve.


But JPM also said that curve flattening at this point in the business cycle is no unusual – it happens every time.


What is more, there is still a long way to go to see a curve inversion.


“The curve was a great indicator of slowdowns, but it would need to get inverted to produce the signal. We are still 70bp away from this and do not expect to get the signal until sometime in 1H 2019. Crucially, equities have never peaked before the yield curve became outright inverted,” the US investment bank said in its note.


George Matlock – LiveSquawk News

table bottom