The UST yield curve continues to flatten (as it does elsewhere). All sorts of mainstream articles have been published lately about it. Many of them often refer to academic pieces ostensibly trying assuage all fears about the yield curve’s threatening inversion. Fret not the distortion, they say.
And they are right. As I constantly remind people, it’s not inversion that anyone should worry about. All that matters is where the curve has been flattening, and not just recently. For years, it’s been shriveling and shrinking, a poignant likeness for the global economy.
Not so in the mainstream. The economy is booming. To reconcile how the yield curve could behave this way while strong growth is happening all sorts of intellectual byproducts are employed. Here’s another one published today:
Goldman Sachs Group Inc. is telling traders to be wary of reading Federal Reserve Chairman Jerome Powell’s comments last week as dovish for the path of interest rates.
Ten-year Treasury yields fell Friday on Powell’s speech at the Kansas City Fed’s annual policy symposium, when he said “there does not seem to be an elevated risk of overheating.” What’s more, the maturity’s spread over two-year yields is close to the lowest since 2007.
Apologies to Goldman Sachs, that’s not what’s holding rates lower. Long end investors don’t care if Chairman Powell is dovish, hawkish, or whatever position might sit in between. They are betting he’s wrong about whichever position he may take at various times. There is no “strong” economy, a reality that the flat 3% UST curve says will be revealed soon enough.
It starts with decoupling; or, rather, how decoupling isn’t a thing. The word has been used over and over, several times switching positions. In early 2008, the global economy especially EM’s were to decouple from weakness in the US and Europe. It didn’t end up that way, of course, as the Great “Recession” by 2009 hit everyone via the eurodollar system.
