The yield curve has been on a rollercoaster ride over the last 3 years. While the latest inflation print point to higher for longer rates, the prophecy may turn to be self-fulfilling once again.
I think living here in Oakland, and seeing the socio-economic collapse already happening, is the big reason I believe the curve forecast will be correct. We weathered the 2008 recession/depression relatively unscathed, but this time around the situation seems massively different. I hope I'm wrong. Thanks again for your work!
Inverted yield curves have not triggered the recession alarm this time as your graphic suggests is because of term premiums as one reason.
Term premiums for the 2 yr and 10yr have also been historically low suggesting investors have confidence in Powell & Co's ability to steady the ship away from choppy inflation. I think 10Yr term premium is flat as of writing. Part of the term premium can also be decomposed into inflation risk premium which also seems to be well anchored. The nearest clue is the 1yr and 3yr inflation expectations.
You are right. The 10Y bond yield has to decline both in its inflation component (which has been more or less steady over the last year, as inflation started coming down, though higher than the pre-pandemic levels, I am talking about 10Y breakeven FYI), and term premiums (which too, to your point, has remained more or less steady). Last Oct/Nov, we saw a spike in term premiums in the 10Yr after Powell indicated that he has going to keep rates longer than anticipated, which led toa steepening in the inverted yield curve, but at the moment.
But I think, the longer inflation remains above target (esp. core services excluding shelter), we will likely see a re-steepening in the shorter end of the yield curve, which doesn't necessarily turn into a recession, unless the longer end inverts sharply and triggers the Fed to start lowering rates immediately. But for now, the dance continues.
Very interesting post! Monday Macros are always a treat. I have to admit that at times it was a little difficult to follow, but the graphs and outside links helped! I finally know what a yield curve really means. Thanks!
Thank you for your kind words and I am even more delighted you went and watched The Matrix, I am assuming you watched the original 1999 film (which was truly a masterpiece)?
Thanks Euphman, it is a great visualization indeed (something I can't take credit for), but it gets the point across of the volatile economy that we have been through over the last few years.
Amrita, I appreciate your explanation of a yield curve. I have a much better understanding after reading your article. Thank you!
“On the other hand, Shelter (a.k.a Housing) inflation, which represents 40% of the core CPI basket is still elevated. While I expect to see a disinflationary impact to the overall Housing component in core CPI as rent of primary residence continues to normalize, this seems to be a slow process.”
In my area and many parts of Nevada the prices of homes are coming down.
Thank you Charlotte. So glad that my explanation made sense.
As for Housing, I too think prices are moderately going to be coming down this year. Rents are falling fast (in some parts, at least), so it's a matter of time, before the inflation report reflects that.
It is however, the "services excluding housing" part that needs to sufficiently come down, before Powell makes any moves in his rate cut plans.
Thanks Sanuj. And yes, I think a fan girl is still an understatement lol. The original 1999 movie was just extraordinary, I think I only understood the movie properly much later on when i grew older and that just blew my mind. Don't care for the latest Matrix Resurrection, which I think was released last year.
Very nice write up. I am sensing a little more pessimism creeping in. Welcome to the dark side. We’ve got cookies!
hahahaha....well, that's why I added "pragmatic" in front of "optimist" to cover the dark side.
Thanks for the explanation of the yield curve! Many articles reference it clearly having no idea what it is.
Thanks @samoan62. Glad the explanation made sense and hope you enjoyed the post.
Thank you for allowing me to read. Very incisive and well thought piece. Looking forward to future articles and views
Thank you Barry for your kind words, glad you found the post insightful.
Really enjoyed reading this post. Big thanks to you✌🏼
Thank you Nam, appreciate your kind support.
Enjoyed every bit of the article. Keep up the good work
Thank you for your kind words and support.
Thanks for the great break down of the inverted yield curve! I am naturally pessimistic to begin with, so...:)
Thanks Andreas, well an inverted yield curve is a natural cause to be pessimistic, so I get it.
I think living here in Oakland, and seeing the socio-economic collapse already happening, is the big reason I believe the curve forecast will be correct. We weathered the 2008 recession/depression relatively unscathed, but this time around the situation seems massively different. I hope I'm wrong. Thanks again for your work!
Thank you. Very helpful for me with little knowledge finance
I am delighted, I do enjoy breaking down financial concepts, so it is a true success when non-finance folks are able to make sense of it all.
Inverted yield curves have not triggered the recession alarm this time as your graphic suggests is because of term premiums as one reason.
Term premiums for the 2 yr and 10yr have also been historically low suggesting investors have confidence in Powell & Co's ability to steady the ship away from choppy inflation. I think 10Yr term premium is flat as of writing. Part of the term premium can also be decomposed into inflation risk premium which also seems to be well anchored. The nearest clue is the 1yr and 3yr inflation expectations.
You are right. The 10Y bond yield has to decline both in its inflation component (which has been more or less steady over the last year, as inflation started coming down, though higher than the pre-pandemic levels, I am talking about 10Y breakeven FYI), and term premiums (which too, to your point, has remained more or less steady). Last Oct/Nov, we saw a spike in term premiums in the 10Yr after Powell indicated that he has going to keep rates longer than anticipated, which led toa steepening in the inverted yield curve, but at the moment.
But I think, the longer inflation remains above target (esp. core services excluding shelter), we will likely see a re-steepening in the shorter end of the yield curve, which doesn't necessarily turn into a recession, unless the longer end inverts sharply and triggers the Fed to start lowering rates immediately. But for now, the dance continues.
I see your point Amrita. Thank you for spending time to elaborate your point.
Very interesting post! Monday Macros are always a treat. I have to admit that at times it was a little difficult to follow, but the graphs and outside links helped! I finally know what a yield curve really means. Thanks!
Truly delighted Harshini. Thanks for your support.
Just finished reading, and then I decided to watch The Matrix, which is just as excellent as your post.
Thank you for your kind words and I am even more delighted you went and watched The Matrix, I am assuming you watched the original 1999 film (which was truly a masterpiece)?
Never seen a yield curve dance, much less like yours did. Thanks. It’s a fabulous way to view it over time.
Thanks Euphman, it is a great visualization indeed (something I can't take credit for), but it gets the point across of the volatile economy that we have been through over the last few years.
love it ... love it ... thank you !!
Thank you Deepak, glad you enjoyed it.
Amrita, I appreciate your explanation of a yield curve. I have a much better understanding after reading your article. Thank you!
“On the other hand, Shelter (a.k.a Housing) inflation, which represents 40% of the core CPI basket is still elevated. While I expect to see a disinflationary impact to the overall Housing component in core CPI as rent of primary residence continues to normalize, this seems to be a slow process.”
In my area and many parts of Nevada the prices of homes are coming down.
Thank you Charlotte. So glad that my explanation made sense.
As for Housing, I too think prices are moderately going to be coming down this year. Rents are falling fast (in some parts, at least), so it's a matter of time, before the inflation report reflects that.
It is however, the "services excluding housing" part that needs to sufficiently come down, before Powell makes any moves in his rate cut plans.
Thanks for reading and your support, as always.
I always enjoy learning about finances from your well curated blogs! Thank you! 🤗💖✨💖
🙏🏼🙏🏼🙏🏼
Nice. I learnt about yield curve and its types through this post. Thank you for the simple explanation, Amrita.
I also understand that you are a 'Matrix' fan girl.
Thanks Sanuj. And yes, I think a fan girl is still an understatement lol. The original 1999 movie was just extraordinary, I think I only understood the movie properly much later on when i grew older and that just blew my mind. Don't care for the latest Matrix Resurrection, which I think was released last year.
True. The original Matrix movie is one of a kind.
100%