The slope of the yield curve (difference between yields on ten-year UST vs three-month UST) and is often looked to as an indicator for the future direction of the US economy. When the curve is steep, the environment is conducive for economic growth, and when the curve flattens, or turns negative, you can expect the economy to slow down, or even contract.
The chart below shows the change in the yield curve since the start of 2009. At a current level of 336 basis points, the curve is currently near the high end of its recent range. Given the fact that the curve steepened to near record levels during the credit crisis, the current level also ranks in the 95th percentile of all readings going back to 1962.
Some have argued that yield curve is no longer relevant as a reliable indicator given the fact that near record steepness has only been accompanied by a slow and gradual recovery. That argument may certainly have some merit, however, we would caution that back in 2006 when the yield curve last inverted, there was also a widespread view that it was no longer relevant due to the fact that the S&P 500 kept rallying. While it took some time back then for the curve to make its presence felt, when it finally did, the economy and the market's cratered. Along those same lines, we would caution that as long as the economy continues to recover and grow, investors ignoring the yield curve should ignore the yield curve at their own peril.Click to enlarge