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Why Is the Curve Steepening Now?

Economic thinking requires seeing what isn’t happening as well as what is.
Inquisitive investors can read Patrick’s clarion insights in the Macro Growth and Income Alert newsletter, where he infuses each issue with a macroeconomic outlook that points to the strongest sectors and best-in-class stocks. His fundamental perspective on stock selection coupled with Robert Ross’s quantitative rigor helps subscribers earn a consistent annual income using stocks and secured options. Before joining Mauldin Economics, Patrick was the managing editor at All Star Fund Trader, an award-winning advisory service near the top of Hulbert Financial Digest ratings for eight years. For over a decade, he was a contributor to Weiss Research, and he served as an equity portfolio manager for high net worth investors. Add to that his experience as a stock analyst, securities and commodities representative, compliance officer, risk manager, and even as a military intelligence officer—and you’ll understand why Patrick’s second-to-none research intuitions make him a trusted member of John Mauldin’s inner circle. Check out Patrick’s latest market take with a model portfolio designed for consistent income. Subscribe to Mauldin Economics’ Macro Growth and Income Alert newsletter.
Inquisitive investors can read Patrick’s clarion insights in the Macro Growth and Income Alert newsletter, where he infuses each issue with a macroeconomic outlook that points to the strongest sectors and best-in-class stocks. His fundamental perspective on stock selection coupled with Robert Ross’s quantitative rigor helps subscribers earn a consistent annual income using stocks and secured options. Before joining Mauldin Economics, Patrick was the managing editor at All Star Fund Trader, an award-winning advisory service near the top of Hulbert Financial Digest ratings for eight years. For over a decade, he was a contributor to Weiss Research, and he served as an equity portfolio manager for high net worth investors. Add to that his experience as a stock analyst, securities and commodities representative, compliance officer, risk manager, and even as a military intelligence officer—and you’ll understand why Patrick’s second-to-none research intuitions make him a trusted member of John Mauldin’s inner circle. Check out Patrick’s latest market take with a model portfolio designed for consistent income. Subscribe to Mauldin Economics’ Macro Growth and Income Alert newsletter.

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.

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