Globally, government bond yield curves have flattened as central banks started signalling the end of the era of ultra-loose monetary policy. But the flattening of yield curves accelerated last week after the UK reduced bond-issuance plans and the Bank of Canada accelerated the time of potential future rate increases.
The flattening was so striking that the longer end of the US Treasury market, the 20- to 30-year segment, became the first to invert.
Curve inversion is not a good omen; it almost always portends some form of sell-off/recession by roughly 18 months. In addition, the end of easy money may have other impacts on jittery investors.
The chart shows the 10- to 30-year US Treasury spread – a proxy for uncertainty in the medium term – and the MOVE Index which measures short dated volatility, i.e. the price of risk.
These were closely related until central banks stepped in post credit crisis; with the Fed stepping back, we may see further normalisation either by deeper curve flattening or an increase in forward looking risk. It could be a bumpy ride.
Inflation is always and everywhere a monetary phenomenon. Although we at Kieger are by no means committed monetarists, this chart lends more credence to the idea that inflation will be moving lower in the next months.
The huge withdrawal of central bank liquidity happening currently is truly “unprecedented” (an otherwise-overused term currently). Despite all of the detailed analysis on the effects of quantitative tightening no one can predict the full impact this will have, but it is certainly not Fed Chair Yellen’s 2017 expectation of “watching paint dry”.
Inflation continues to drive recession worries. US inflation continues to drive recession worries with CPI running at 8.6% YoY in May.