August 2019 Yield Curve Update

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

The last couple of months have seen a bearish turn.

The Fed seems to be tepid about its recent dovish turn. It would take quite an aggressive posture for it to get ahead of this.

The yield curve has flattened even as short-term rates have declined.


I had a brief flirtation with optimism, but the last couple of months have seen a bearish turn.

This first graph is a graph comparing the Fed Funds rate and the 10-year Treasury yield. The orange line is the effective inversion line. The zero lower bound means that long-term yields have a kind of option value, biasing the yield curve upward. This is my attempt at adjusting for that effect. The yield curve is highly inverted.


In the meantime, the Fed seems to be tepid about its recent dovish turn. It would take quite an aggressive posture for it to get ahead of this. For this to become less bearish, the 10-year yield would need to rise substantially. It's unlikely to do that without an aggressively dovish move, which the Fed would signal with a sharp decline in the Fed Funds rate.

I expect the long-term rate to bounce around a bit, but it seems unlikely that it will push back away from inversion.

The second graph shows the yield curve at various dates over the past few months. It has flattened even as short-term rates have declined.

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