HALISTER1: RATES: Yield Curve ‘Not Signaling a Recession,’ Jefferies Says

RATES: Yield Curve ‘Not Signaling a Recession,’ Jefferies Says

(Bloomberg) -- UST curve flattening trend has been “an ongoing, if erratic event” since early 2011, and “has yet to presage any significant or prolonged downturn in economic activity,” Jefferies economists Ward McCarthy and Thomas Simons say in note.
  • Since summer 2015, spread between fed funds rate and 30Y yield contracted to ~220bp from ~310bp, while 2/30 coupon curve flattened to ~190bp from ~225bp; over past 30yrs, first spread has averaged 182bp, second 144bp
    • So by historical standards, “current slope of the yield curve is steep, not flat”
  • When past curve flattening foretold significant economic deterioration, 3/30 spread tended to be near zero or inverted; currently it “is not even in that neighborhood, and has a long way to go before it will be”
  • Recent flattening reflects disinflation and deflation risk, causing “market-based inflation expectations to collapse with squeezed BEs, plunging 5yr5yr forwards and, consequently, falling nominal long-term rates”
  • Therefore, flatter curve reflects “deflationary pressures” and does “not presage an economic slowdown”
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Source: BFW (Bloomberg First Word)

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Thomas Simons (Jefferies LLC)
Ward McCarthy (Jefferies LLC)

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