Curve Flattens

With an FOMC rate hike all but guaranteed this Wednesday, rates markets will likely be the subject of a lot of investor focus this week, and one part of the market that bears watching is the yield curve. Of all the different tools used by economists to forecast recessions, one of, if not the, most reliable is the yield curve, and specifically the spread between the yield on the 10-year and 3-month US Treasuries. Even the NY Fed has cited its utility as being a good predictor of recessions, specifically when the curve inverts (3M yields more than 10Y). In other words, the last thing a bull wants to see is an inverted yield curve.

With the yield on the 10-year rising throughout the year, you might think that the yield curve is steepening, but the opposite has actually been the case. As shown in the first chart, the yield on the 3-month US Treasury has been relentlessly on the rise for months now and is currently up to just under 1.8%, which is the highest level in over a decade. Given that the FOMC is expected to hike rates this week, the increase in three-month yields shouldn’t be a surprise.  Still, when it comes to interest rates, anything preceded with the words “10-year high” takes a lot of getting used to. It seems like just yesterday that rates were at historic lows!

 

While three-month yields have been on an uninterrupted rise, the rise in 10-year yields has started to stall out. In fact, it has been well over a month since the 10-year yield hit a new high.

 

With long and short-term rates recently moving in different directions, the yield curve has flattened considerably in recent weeks and is at its flattest levels of the year as of this morning. At 106 basis points (bps), it is now within 10 bps of its closing low for the last 12 months as well. When it comes to the yield curve, we have made numerous mentions in the past that a flat yield curve by itself does not provide a particularly strong signal for the economy, but the closer it gets to inverting, the more it will be a focus of investors.

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