- The difference between 10- and two-year US government bond yields, at around 20 basis points, is currently the narrowest since 2007.
- When the differential between the two has turned negative in the past, it’s almost always signalled a looming US recession.
- Google searches for “curve flattening” have hit the highest level on record.
The US yield curve continues to flatten with the difference between 10- and two-year government bond yields narrowing to the lowest level since 2007 last week, driven by an ongoing expectation that the Federal Reserve will lift interest rates further in the years ahead.
The differential between the two currently sits at around 20 basis points, continuing to decline from the more than 250 basis point differential seen just four years ago.
Should the current trend continue, the curve looks set to turn negative by early next year, an ominous signal, should it occur, given it has almost always signalled that a US recession will follow in the not too distant future.
Naturally, it has received plenty of attention, including from those seeking further information.
Nothing demonstrates that last point better than the chart below.
Posted on Twitter by Martin Enlund, Chief FX Strategist at Nordea Markets, it shows the differential between 10 and two-year US bond yields overlaid against Google searches for “curve flattening”.
The level of people seeking further information on a flattening yield curve has hit the highest level on record, surpassing the previous peak seen in the mid-2000s.
“With the yield curve often used as a recession indicator, the market’s attention should be of no surprise,” Enlund says.
“The consensus among central bankers is that this is nothing to worry about, but market participants appear sceptical and worry anyway. After all, it’s not as if the track record of central bankers is spotless, no matter how many academic titles they possess.”
Enlund says the markets are right to be worried, suggesting the flattening of the curve, as well as recent divergence in asset price movements, all point to a late cycle mindset among investors.
The flattening of the curve, inversion of US money-market curves, underperformance of cyclicals versus defensive equities over the the northern hemisphere summer and underperforming high-volatility equities versus low-volatility equities are all signs of a late-cyclical mind-set present in the market — the US economy will start slowing,” he says.
“With this we agree, and we consequently expect more of these market developments.”
There’s more here.
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