The Yield Curve Returns To Normalization

Includes: AGG, IEF, SHY
by: Bespoke Investment Group

Hickey and Walters (Bespoke) submit: Not too long ago, we could not go more than a few hours without hearing mention of the yield curve and the so-called negative economic ramifications of long term interest rates (10-year yield) falling below short term rates (3-month yield).

After inverting on and off for a six month period between January and July 2006, the curve inverted once and for all on July 19, 2006. Since then it has remained inverted, market commentators have moved on to other issues of the day, and the economy continues to grow. Until now. The yield curve is back!

While there has been virtually no mention of it up until now, on Friday May 18th, the yield on the three month treasury closed below the yield on the ten-year for the first time in 217 trading days (2.799% vs 2.800%). Granted it was a slim margin (one tenth of one basis point), and the curve has since turned inverted again, but this development marks a shift in trend (focus on the normalization of the yield curve vs. the inversion). You can also count on the yield curve becoming a bigger issue in the days, weeks, and months ahead.

yield curve