A recent Wall Street Journal story stated that “A flattening of the Treasury yield curve in 2017 is a worrying sign for investors banking on resurgent U.S. inflation and growth.”
Hedgeye responded REALLY?! Wall Street Journal: “A Worrying Sign on US Inflation & Growth”
Let’s investigate starting with Hedgeye.
With stocks off all-time highs, there are a lot of bear market stories swirling around about how U.S. economic growth is faltering. One of these false narratives is about the classic economic cycle barometer, the yield curve (i.e. the US Treasury 10-year Yield minus the 2-year Yield).
The yield curve just registered its highest quarterly average in five quarters. So that’s just wrong.
BOTTOM LINE
As we’ve been saying for some time now, U.S. economic growth is accelerating. Expect the yield curve to continue to steepen, despite the false narratives being passed around bears.
Yield Curve Discussion
For starters, “i.e.” is latin for “id est” and means roughly “that is” while “e.g.” stands for “exempli gratia” which means “for example.”
The reference “i.e” is flat out wrong. The yield curve does not equate to the 10-year yield minus the 2-year yield or any other spread, but rather the overall curve of interest rates from overnight to 30-years.
The Hedgeye example pertains to the steepness of a portion of the curve, specifically the 2-10 spread, for a select period of time hand-picked to show steepening.
Let’s investigate other time periods and other spreads.
10-Year Minus 2-year
Is the spread steepening or flattening? The answer depends on your timeframe, but one would have to pick very peculiarly to conclusively say “up”.
10-Year Minus 3-Month
Is the spread steepening or flattening? The answer depends on your timeframe, but one would have to pick very peculiarly to conclusively say “up”.
30-Year Minus 3-Month
Is the spread steepening or flattening? The answer depends on your timeframe, but one would have to pick very peculiarly to conclusively say “up”.
Yield Curve Steepening or Flattening?
You can pick a time-frame and make nearly any claim you want. But what really makes sense?
Looking for Steepening? Here You Go!
Based on the allegedly steeping yield curve, Hedgeye made this statement: “As we’ve been saying for some time now, U.S. economic growth is accelerating. Expect the yield curve to continue to steepen, despite the false narratives being passed around bears.”
Steepening? Really?
Economic Growth Accelerating? Steepening Yield Curve Is Evidence?
Really???
The Allegedly “Accelerating” Economy
Real Bottom Line
- Depending on timeframe, one can claim whatever one wants in regards to the yield curve steepening whether it makes any practical sense or not.
- In practice, the curve often steepens most as the Fed fights recessions, hardly a sign of a strengthening economy.
- Watch the yield curve steepen sharply when the Fed halts hikes hoping to stave off the next recession.
My Guess for first quarter GDP is 0.6%. For discussion, please see Six GDP Estimates: ZeroHedge, Mish, GDPNow, Nowcast, ISM, Markit.
Mike “Mish” Shedlock
A very concise explanation. Thank you.
“As we’ve been saying for some time now, U.S. economic growth is accelerating. Expect the yield curve to continue to steepen, despite the false narratives being passed around bears.”
…
Hedgeye?
Just another “expert” to ignore. If you follow the link, he’s using CEO confidence to make his point. I guess he’s referring to The Conference Board – but hoo knows? Hate it when an “expert” tries to make a point without without documenting source. If Conference Board, you’ll find current survey conducted between mid February and mid March … when Trump Reflation (repeal ACA, cutting taxes, $trillion infrastructure, slashing regulations) all the rage.
Reality proving a bit different.
Massive debt loads + heavy Inventories / Sales = slow growth … at best … till economy enters the ditch.
Hedgeye is garbage (i.e., caca)…always has been…”fake news”, of the financial variety
How can any honest conclusions be drawn on interest rates when there is so much central bank intervention going on here in the usa and across the globe???
With GDP growing at less than 1% and WWIII looking increasingly possible (if not likely), I would not be betting on “yield curve steepening” any time soon.
This clown must be one of the morons who now find themselves trapped in under-water Treasury shorts that they are desperate to get out of.
– I look at 3 yield curves:
1) the 5-year rate MINUS the 3 month t-bill rate. That curve steepened after november of 2016 (think: election of Mr. Trump) and seems to be in the process of flattening right now.
2) the 30 year ($TYX) DIVIDED by the 5 year yield ($FVX). That yield curve kept flattening in the last 2 to 3 years. That curve flattened even more after Trump got elected. But in the last say 2 months it’s “undecided”, it doesn’t flatten more, it has to make up its mind: steepen or flatten (more).
3) The 20 year yield MINUS the 2 year yield seems to have started a steepening process.
– A flattening or steepening yield curve DOES NOT suggest a recession is coming or inflation coming. It’s a gauge of how much risk market participants are willing to take.
(the ticker tape symbols are from STOCKCHARTS.COM).
“The yield curve does not equate to the 10-year yield minus the 2-year yield or any other spread, but rather the overall curve of interest rates from overnight to 30-years.”
Wow! Congratulations Mish… I think I have yelled at you enough for that one.
Thank you for flushing out Hedgeye.
The long end of the yield curve could blow out, the yield curve could steepen, but the banks could collapse and be insolvent. I know, the bubble pumpers will say, “steep yield curve is good for banks”, but if they’ve been de-capitalized due to that steepening yield curve (ie: their long-term assets losing a lot of value), then there’s no capitalizing on such.
The financial sector (and the US economy more broadly) seems to rely upon long-term interest rates falling, more so than the short-term shape of the yield curve. If we are truly at some sort of bottom for long-term rates, with higher long term rates for the next 30-40 years, then the US economy, in particular the FIRE sector, is bound to significantly underperform.
Looking at charts to predict the future, is magical thinking. Corporate profits are not driven by magic, or direction of lines but rather by politics, consumers, employment, and war (or peace). If charts could tell the future, then every chart obsessed investor would be rich (hint: they are not).
It is neither flattening nor steepening — there is no price discovery.
It is being manipulated by a clueless Federal Reserve that is more focused on defending their academic models than on steering the economy (something they can’t do anyway)
– What “HedgEye” overlooks is that a steeping yieldcurve is one of the first signs of a weakening economy instead of a strenghtning economy.