Macroscope | US Treasury bond yields could be signalling trouble ahead
Dallas Fed Reserve President Robert Kaplan, has cautioned of a risk that the US yield curve could become inverted, where short-end yields are above longer-end ones, a development which in the past has boded ill for the US economy
After two Federal Reserve rate hikes in 2017 and a likely third one in December the US central bank might have expected that the bond market would have taken the hint and steepened the US yield curve. In normal circumstances, longer-dated yields might have been expected to have risen faster than the short-end. But that is not the case.
Instead, the US yield curve has been flattening and while the Fed might find the situation a little unnerving, it may have to come to terms with it.
After all, current circumstances aren’t normal but reflect attempts by the Fed, including moves to reduce the size of its balance sheet, to finally normalise monetary policy in the aftermath of the Global Financial Crisis and its aftershocks.
Higher yields in the longer end of the curve have not outpaced rises in shorter periods. Even as Stanley Fischer, speaking Friday on his last day as Fed vice-chair, said a December rate hike remains achievable if the economic data remains robust, the spread between the two-year and the benchmark 10-year US Treasury (UST) narrowed.
Admittedly, Friday’s UST yield moves are largely explained by benign US inflation data for September, which arguably lessened the case for a December hike, but concerns about the curve flattening had already been raised by Dallas Fed Reserve President Robert Kaplan on October 10.
Stating that he considered the low yield on 10-year USTs “a little ominous” Kaplan wondered if there was a risk that the US yield curve could become inverted, where short-end yields are above longer-end ones, a development which in the past has boded ill for the US economy.