The 10yr-2yr yield curve remains on its new steepener.
The macro is grinding along, subject to daily noise that drives nominal yields up or down (today’s noise du jour is in-line inflation, and a projected Fed rate cut). But the 10yr-2yr yield curve does not really care about interim noise. It continues to maintain its steepening posture and that means it continues to forecast an oncoming “bust” side of the boom/bust continuum we’ve experienced over the last quarter century.
With USD strong and nominal yields pulling back lately, the current signaling is disinflationary, and as interpreted by today’s happily speculative (read: greedy, MOMO’ing & FOMO’ing) market participants, it’s all systems go!
But my view is and for the last year has been that disinflation would eventually reveal itself not to be the happy kind. That it would reveal itself to be the most unhappy, deflationary kind. After that resolution, we can talk about inflation again. Don’t forget, yield curves can steepen deflationary or inflationary, and this one is expected to steepen under both conditions, at different times.
The 3mo/10yr yield curve continues to not yet be de-inverted. But it sure is following in the footsteps of its fellow above. My interpretation of this lag in the curve more tethered to Fed policy (3mo T-bill yield is our proxy for the Fed Funds rate, after all) is that the Fed is still behind the rate cutting curve. At least that is what the market thinks, relative to what is ahead economically and in inflation signaling.
There is a conclusion coming to the events in motion as we close out 2024. The indications above should be married to others, a plethora of others that we use, along with market technicals to take advantage of this. To this point it’s been a pretty boring taking of advantage. Just robotic gains against solid risk management. But when this mess concludes and pivots – and the indicators are flashing – things will change radically.
Again, I have to state that the above is not written by a perma-bear. Someday the headlines will say “Man who predicted the great crash of 2025 has a new prediction [click here]”, but they will neglect that “Man” advised bearish all the way up until “Man” suddenly became right (and was celebrated).
Market management is simply about being on the right side, bullish or bearish. Indicators, including yield curves, are pointing toward a new side coming in ’25.
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Gary Tanashian