As I told Larry Kudlow on CNBC last night, the employment recovery will be poorer than the market appears to expect, for reasons I’ve posted on this blog during the past two weeks. The yield curve is at record steepness. I think that’s an overreaction. In fact, the steep yield curve in the present environment is NOT a harbinger of recovery — it’s a brake on recovery because it encourages banks to own Treasuries rather than risky assets (see below). Here are my top 10 reasons to expect the yield curve to flatten.
1) The Treasury is shifting issuance to the long end of the curve, and the market is front-running the Treasury in anticipation of higher issuance. This effect is temporary.
2) Employment won’t come back because the unvarying source of employment recovery — small business — is flat on its back. The credit crunch for small business (with bankruptcies up 44% year on year) keeps getting worse