February 2019 Yield Curve Update

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Includes: FLAT, STPP
by: Kevin A. Erdmann
Summary

Well, could the Fed end up with a soft landing here?

In terms of my measure of inversion, it hasn't budged, and when inversion has happened in the past, it has always been uninverted by lowering short-term rates, not by sitting tight while long-term rates rise.

Can positive sentiment be strong enough to push savers into risk-taking and push long-term yields up while the Fed stays put?

Well, could the Fed end up with a soft landing here? Interest rates have recovered somewhat. We are basically at the same place we were a month ago, but it seems that sentiment has turned toward asking the Fed for more wage growth rather than worrying so much about inflation and asset prices. And, the market seems to believe that the Fed is done hiking. Forward inflation expectations are moving back up too.

In terms of my measure of inversion, it hasn't budged, and when inversion has happened in the past, it has always been uninverted by lowering short-term rates, not by sitting tight while long-term rates rise. That doesn't mean it would be impossible. My hunch is that we are still more likely to see an eventual contraction, where the Fed will hold to the current rate target for too long as conditions deteriorate.

It still seems like the best position is to be somewhat defensive - that the next big asset class move will be higher bond prices.

But there does seem to be a change in the air. Can positive sentiment be strong enough to push savers into risk-taking and push long-term yields up while the Fed stays put?

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.