Current yield curve is a good sign for economic growth
NOV. 22, 2019
Long-term interest rates have spiked in recent weeks as investors adopted a “risk-on” approach and equity markets rallied. Ten-year Treasuries reached their highest yields since July, rising above 1.9% in early November. As recently as early October, 10-year yields were as low as 1.5%.
Also, it wasn’t too long ago (late August, to be exact) that investors were hyper-focused on the inversion of the yield curve. The spread between 10-year and 2-year yields turned negative for four days in August, sounding the historically indicative recession signal. Just one month ago, the yield curve was still inverted from the shortest-term yields all the way to 5-year Treasuries. But on Friday, November 8, the gap between 10-year and 2-year yields reached its widest level since July. Currently, the curve is positively sloped at each point from 3-months to 30-years, signaling a more optimistic view of the economy.
The recent inversion of the yield curve was driven by technical factors, not fundamental ones. Historically, a yield curve inverts as investors, fearful of an economic slowdown, flee to long-term bonds and yields decline. Typically, Federal Reserve stimulus lags this move, so short-term rates remain high and the yield curve inverts.
In the current environment, massive global central bank stimulus through bond-buying programs have driven rates negative. Of the $12 trillion in negative-yielding global debt, 80% is held by central banks, indicating the Bank of Japan and European Central Bank (not institutional and retail investors) are buying negative-yielding debt. Normalization of the domestic yield curve is a good optical sign for economic growth, though the rise of domestic rates will likely be limited until global central banks slow buying and rates turn higher.
Review relevant client material from Nationwide