The yield curve continues to flatten but nobody wants to ‘pop the bubble’
The 2-10 Treasuries yield spread has narrowed by 10 bps since the start of the year, and from the highs this year, it has fallen by roughly 35 bps.
I think I’ve said this one too many times, but an inverted yield curve isn’t a “be all, end all” indicator of a recession but historically, it has been an accurate predictor. And the market will take notice of that, and it could be a self-fulfilling prophecy on its own if given room to run.
The Fed has still been rather nonchalant about the trend that is taking place, but with a possibility of three more rate hikes this year (including today), it’ll only serve to flatten the curve even more.
Although the Fed may not address this issue explicitly, you can bet there will be quarters among the FOMC that may portray some element of fear in hiking rates further if the yield curve continues to flatten.
But then again, the Fed can’t just put rates on hold because of the yield curve alone. There will be a lot of explaining and convincing that Powell and co. needs to do should that be the case. And that will in turn affect market expectations on future rate hike bets by the Fed – more so when we are moving into 2019.