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Please consider Bond Traders Should Prepare for Yield Curve to Zero Out in 2018.

Just how much further can the relentless flattening of the U.S. yield curve go? All the way to zero, according to T. Rowe Price Group.

“The peak yield on the 10-year Treasury should roughly approximate where the final level of fed funds settles out, so that to us implies a flat yield curve if we assume the Fed will do two or three hikes in 2018,” Mark Vaselkiv, chief investment officer of fixed income at T. Rowe Price, said at a press briefing. In his eyes, the Fed will likely stay the course, and the difference between short- and long-term debt could reach zero as soon as the second half of next year.

Expectations are beginning to build for the Fed to step up its pace of rate hikes as inflation shows signs of stabilizing and with the lowest unemployment rate since 2000. Economists at Goldman Sachs Group Inc. and JPMorgan Chase & Co. are among those forecasting that the Federal Open Market Committee next year will likely tighten four times, rather than the three implied in policy makers’ projections.

Hike Four Times?

If the Fed manages to hike four times, I believe we will see a strongly inverted curve. A few charts will help explain.

US Treasury Yields 3-Months to 30-Years Monthly Chart

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30-year and 10-year yields have been falling as the Fed has been hiking.

US Treasury Yields 3-Months to 5-Years Weekly Chart

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5-Year yields have been flat for over a year. Everything shorter has been rising, everything longer has been falling as shown in the above chart.

US Treasury Yields 3-Months to 5-Years Monthly Chart

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This economy is nowhere near as strong as most believe.

Thursday's industrial production report looked good, but even the Fed admitted that most of it was hurricane related.

For details, please see Industrial Production Jumps: Another Hurricane Effect?

It will not take 4 hikes to the yield curve to flatten. Portions of the curve could invert in December with no hikes at all in 2018.

While others see price inflation picking up, I see price deflation once the equity and junk bond bubbles burst.

I am sticking with my prognosis that a new low in yield is coming on the 30-year long bond.

Mike "Mish" Shedlock