Eoin, you’re rightly highlighting the dangers of the steepening Yield Curve, or rather “uninversion” currently being undertaken. Typically though, this is a result of the Fed doing a U-Turn and cutting rates at the front end to soften the impact of a sluggish economy, or one in recession.
In this instance, it’s the other end of the curve showing the movement, only higher, as inflation continues to be a concern and the demand for longer term bonds isn’t enough to match the considerable supply. How does the change in dynamic to this “uninversion” influence your thinking?
Thank you for this topical question. I had a look at several past examples of when the 10-year – 3-month yield curve spread was inverted. The vast majority follow the process you describe at the beginning of your email.
Generally, the long-end pre-empts easing at the short end. In other words, the 10-year peaks before the 3-month. Then the 3-month collapses as interest rates are cut and the curve steepens into sharply positive territory.Click HERE to subscribe to Fuller Treacy Money Back to top