Why Is the Curve Steepening Now?

Patrick Watson |

Nineteenth-century writer Frédéric Bastiat, in his classic “Broken Window” parable, warned that economic thinking requires us to see what isn’t happening as well as what is.

This yield curve chart from Macquarie Research provides a good example.

Source: Macquarie Research

The chart shows the difference between 2-year and 10-year US Treasury bond yields. Traders follow this because a “steep” yield curve is what gives banks their greatest profit opportunity.

Normally, the curve gets steeper (higher) in recessions when the Federal Reserve is cutting interest rates, and lower/flatter when the Fed is tightening during growth phases.



Why Is the Curve Steepening Now?

That’s under normal conditions, which we apparently don’t have right now. The yield curve has been steepening since the US election despite the Fed’s hiking rates in December and forecasting more of the same in 2017.

Why is this? For now, we can only speculate. But this is the kind of anomaly that Bastiat said we should notice. It is likely important for a reason that will be obvious only in hindsight.

Subscribe to Connecting the Dots—and Get a Glimpse of the Future

We live in an era of rapid change… and only those who see and understand the shifting market, economic, and political trends can make wise investment decisions. Macroeconomic forecaster Patrick Watson spots the trends and spells what they mean every week in the free e-letter, Connecting the Dots. Subscribe now for his seasoned insight into the surprising forces driving global markets.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Comments

Emerging Growth

Immunovaccine Inc.

Immunovaccine Inc is clinical stage biopharmaceutical company. The Company develops products based on its proprietary vaccine enhancement platform in T cell activating therapies for cancer.

Private Markets

Knightscope

Autonomous security robots providing advanced detection capabilities at $7 per hour - aiming to define the future of security. Help #StopTheViolence.

Cross Campus

With over 500 members and operating 80,000 square feet by summer 2016, Cross Campus is one of the country’s top ten shared, collaborative office or "coworking" operators in the US.…