Even as the FOMC is still adding to its balance sheet, hawkish commentary from Powell and company has caused massive moves in the fixed income market resulting in a massive flattening of the yield curve. Today alone, the spread between the yield on the 10-year and 2-year US Treasuries has narrowed by nearly 10 basis points (bps). Even more extreme, is the fact that over the last three months the curve has flattened by more than 50 bps from well over 100 bps to just over 60 bps.
Looking at the three-month rate of change in the yield curve, it hasn’t flattened this fast in at least five years. Last summer, we saw a similar but not as severe of a move.
Taking a longer-term look, flatter yield curves aren’t necessarily a negative economic signal, but there is an inverse relationship between the level of the yield curve and recession concerns i.e., the flatter the curve gets the more the market starts to price in the odds of a recession. As shown in the chart below, every recession since the late 1970s has followed an inversion of the curve.
In terms of the pace of flattening in the 2s10s curve, the current pace has been the swiftest since January 2015, and longer-term, there haven’t been a whole lot of periods where the curve flattened at a faster rate. Looking on the bright side, though, a rapid flattening of the yield curve by itself has not been a siren song for an impending recession. As shown in the chart below, there have been numerous times over the last 40 years where the curve steepened by as much (red line) or more than it has in the last three months and the economy was nowhere near a recession. Click here to view and sign up for Bespoke’s premium membership options.