Yield Curve Steepening Hints at Rebounding Inflation, but You Shouldn't Panic Yet
Gary Tanashian | Jan 26, 2024 02:10AM ET
Reference Inflationary Yield Curve Steepening? from January 11.
In my opinion, after the secondary extreme inversion of the 10-2 yield curve in July a new yield curve steepener was in the bag. That is exactly what the curve has been doing since the secondary inversion.
This phase of the yield curve steepener is thus far mildly inflationary in its signaling. We know this because the nominal 10-year yield has been rising since December along with the yield curve steepener.
Indeed, the curve has been steepening under inflationary signaling since July, with a brief interruption of a Goldilocks-style consolidation (black dashed ‘handle’/bull flag) as nominal yields dropped from October to December.
Keep in mind the word “signaling” used above. It’s important. The bond market was signaling inflation concerns even as the macro went disinflationary Goldilocks for the majority of 2023.
That implied monetary tightness included what may turn out to have been a policy overshoot, again, in its signaling.
In reality and my opinion, there is no more paper and digital policy that can rehabilitate this experiment gone way off the path of sound practices and into a Twilight Zone of the unknown.
But if the machines are programmed to interpret literally, then maybe so should we at least be aware of that which they are interpreting.
The Yield Curve steepener is thus far inflationary. It calls into question the next step after the Goldilocks call a year ago.
That was for disinflation to morph into deflationary (and there are still signals in play indicating the potential for that outcome). But it could also reverse and brew a worsening inflation problem.
To make matters more complex, throughout a yield curve steepener, both inflation and deflation can be the root instigator at different times.
For example, refer to 2007 when the yield curve steepener began as a long phase of inflationary pressure was just starting to ease (sound familiar?), and then it steepened impulsively in 2008 as deflationary pressure became undeniable.
Get The News You Want
Then there was the 2020-2021 steepening that was purely under inflationary pressure. That one failed in Goldilocks and now here we are. Pick your poison.
In my opinion, the administration in power is all but ready to pull the fiscal (inflation) lever sooner, not later, and to try to strong-arm the Fed as well.
We’re well under T-minus one year after all. Despite the political rancor tearing this country apart, confidence in the system (and its monetary and political, AKA fiscal, overseers) is still intact.
The average American has no idea the risk they are being routinely subjected to by legions of financial advisers and finance managers operating to the old rules.
Rules, I think, that are highly suspect in the new age of the Continuum’s secular trend break.
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.