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Despite Rising Bond Yields the Yield Curve is Still Flattening

The flattening of the yield curve suggests trouble is ahead for the Fed before the Fed even begins hiking.
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Yield curve data from US Treasury, chart by Mish

Yield curve data from US Treasury, chart by Mish

The above chart shows yield curve spreads over time. That means the difference between yields of two different duration.

A flattening of the yield curve is a recession warning. 

The three-minus-one spread has been rising, but that is the portion of the curve most sensitive to rate hikes. 

US Treasury Yields 

US Treasury yields, chart courtesy of StockCharts.Com, annotations by Mish.

US Treasury yields, chart courtesy of StockCharts.Com, annotations by Mish.

The top square box shows what a truly flat or inverted curve looks like. Inverted means longer durations have a lower yield than shorter durations. That is a strong recession signal.

Current Spreads

Interest rate data from US Treasury, chart by Mish

Interest rate data from US Treasury, chart by Mish

2-10 Spread

Economists like to watch the 2-10 spread because that is one of the most reliable recession indicators.

Seemingly, inversions are far away, but that is mostly an illusion.

The 2-10 spread has been sinking like a rock. That spread was 1.58 percentage points on March 19, 2021 as shown in the lead chart. It's now down to 0.61 percentage points.

If the Fed gets in as little as two hikes, the 2-10 spread will invert as it typically does before a recession. 

Of course, the 10-year yields may keep rising, but the problem is 2-year yields have risen faster. 

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And if the 10-year yield drops, which is likely on any bad economic data, then we could easily see an inversion as soon as March when the Fed is first expected to hike.

Pondering the Stunning Growth In Rate Hike Bets and Predictions

On January 29, I was Pondering the Stunning Growth In Rate Hike Bets and Predictions

Projection Synopsis

  • Bank of America amazingly projects 7 hikes, one at every meeting in 2022 plus 4 more in 2023. That would put the Fed Funds Rate at 2.75% to 3.00% at the end of 2023.
  • BNPP projects 6 this year and 3 more in 2023. That would put the Fed Funds Rate at 2.25% to 2.50% at the end of 2023.
  • Deutsche Bank and Wells Fargo project 5 this year and 3 more in 2023. That would put the Fed Funds Rate at 2.0% to 2.25% at the end of 2023.
  • Barclays and UBS project 3 this year with no forecast for 2023.

11 hikes in less that two years would practically guarantee the biggest inversion in history and accompanied by a massive recession to boot. 

Strongly Leaning Towards Recession

For those who may have missed my January 29, 2022 post, I repeat my stance: With Nearly Everyone Looking the Other Way, It's Time to Discuss Recession

The faster the Fed hikes and removes QE liquidity, the faster we will be in recession. Three hikes in the next three meetings might easily be sufficient.

This post originally appeared at MishTalk.Com

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