The Incredible Flattening Yield Curve

This is a pretty amazing image, courtesy of J.P. Morgan Asset Management:

2018_0630_US_Yield_Curve
Source: J.P. Morgan Asset Management (obviously)

People are really starting to worry the Fed is going to invert the curve. Historically, an inverted curve (short rates above long rates) has been a pretty good recession indicator. I don’t have a particularly strong opinion about the direction of interest rates, especially now that we are above 2% on the 2-Year. But I do think this chart is telling us something.

If the curve is basically flat from 7 years on out to 30 years, that is not exactly a ringing endorsement of long-term growth and inflation prospects. I’ve heard from some fixed income people that it’s demand for long-dated paper from overseas buyers holding the 30-year yield down. I’ll buy that. But it’s still telling us something about supply and demand for capital along various time horizons.

Namely: we’ve got an awful lot of long duration capital out there looking for a home, and not enough opportunities to absorb it all.

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