The strength and number of inversions peaked around April 1. Inversions are now mostly gone.
Yield curve data from New York Fed, chart by Mish.
What's Going On?
It's typical for the yield curve to invert before a recession then steepen as the Fed takes action, but that's not what's going on here.
Rather, the market is pulling back expectations for the speed of Fed tightening.
The market is also beginning to digest the idea that perhaps the Fed will not be aggressive with Quantitative Tightening (QT).
Brainard Then and Now
- On April 6 RIA reported Lael Brainard Scares Investors with QT
- On April 14 (PAYWALLED), MNI reported Lael Brainard said the Fed could begin rolling off assets as soon as June [Not May].
Brainard is the Fed's Vice-Chair so that opinion carries weight.
Faster Quantitative Tightening? Not Anytime Soon Says Fed Governor Christopher Waller
Also recall my March 25 post Faster Quantitative Tightening? Not Anytime Soon Says Fed Governor Christopher Waller
Beware of a Very Aggressive Steepening of the Yield Curve by the Fed
On March 15, I reported Beware of a Very Aggressive Steepening of the Yield Curve by the Fed
That was not my opinion but that of Joseph Wang and Harvey Bassman who proposed the Fed would steepen the curve via aggressive QT.
Many people expected the Fed to be aggressive with QT starting with the May meeting. I was not one of them.
The curve steepened because the odds of aggressive QT is slipping.
Those who called for steepening appear to be correct for the wrong reason. Once the Fed starts hiking more aggressively, the inversions will reappear.
This maneuver does not mean no recession. It's mostly irrelevant. There will be no soft landing.
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