Some investors are concerned the flattening yield curve suggests the Fed could raise interest rates more than the economy can handle. Treasury Yield Curve Rates: These rates are commonly referred to as "Constant Maturity Treasury" rates, or CMTs. Get the Capital Ideas newsletter in your inbox each week. Investors demand higher long-term rates to make up for the lost value because inflation reduces the … Flattening the COVID-19 Curves. An inverted yield curve is one of the most often quoted precursors to the start of a recession. Breathless Reporting. Similar information about collective investment trusts can be obtained from Capital Group or participants' plan provider or employer. Does a Flattening Yield Curve Mean Recession? The reasons are pretty simple. Flattening of the yield curve A yield curve tracks the yields of Treasury securities maturing at different time periods. Past results are not predictive of results in future periods. The yield curve — which reflects the difference between shorter and longer-term US borrowing rates — fell to an 11-year low. In the money: Financial exchanges hit the sweet spot, Brexit deal builds new barriers to U.K.-EU trade, 2021 Outlook: Turning points on the road to recovery. Head of Asset Allocation, Research Affiliates Investors should consider this potentially bearish signal as just one data point within a bigger picture, while many positive signs remain. An inverted yield curve is one of the most often quoted precursors to the start of a recession. Author: Elizabeth Roy Stanton The benchmark 10-year yield fell 1 basis point to 0.917%, pulling one measure of the yield curve - the spread between the two- and 10-year yields - down to 79 basis points, the lowest in a week. It signals investors expect inflation (and interest rates) to stay low for a long time. Steepener means the widening of yield curve. For the past 50 years, an… flattening of the yield curve in the United . All Capital Group trademarks mentioned are owned by The Capital Group Companies, Inc., an affiliated company or fund. Partner & Senior Advisor, Research Affiliates, and Professor, Duke University . Use your plan ID (available on your account statement) to determine which employer-sponsored retirement plan website to use: IF YOUR PLAN ID BEGINS WITH IRK, BRK, 1 OR 2. A yield curve is a line that interest rates of bonds having equal credit quality but differing maturity dates. The yield curve is a line on a graph where the vertical axis shows bonds' annual interest payments and the horizontal shows time until the bond matures, when investors get their principal back. Conversely, a situation in which the yield curve is flat is called flattener. There are complex trading strategies built around the yield curve, but analysts are finding a simple reason why the yield curve on US Treasuries is flattening. However, a flattening yield curve has not historically translated into less credit growth, quite the opposite in fact (Exhibit 3). States. First, it may be that the market is anticipating a rise in the risk-free rate. Too often the flattening of the yield curve is described as though it occurs in a vacuum. But even if evidence supports this trend, it is not an indicator of timing. But even if evidence supports this trend, it is not an indicator of timing. There are two types of yield curve risk: steepening and flattening. An inverted yield curve is one of the most often quoted precursors to the start of a recession. The Federal Reserve's rate moves tend to influence the short-end of the curve, including the 2-year Treasury yield, more quickly. The 30-year Treasury's yield has dropped below the 10-year's for the first time since late 1994. Today, policymakers are paying increased attention to the so-called flattening yield curve — the difference in yields between long-term and short-term Treasury bonds. Data is a real-time snapshot *Data is delayed at least 15 minutes. Still, while the flattening yield curve is cause for concern, it's not yet time to panic, says LaVorgna. There are two common explanations for upward sloping yield curves. Cam Harvey looks at the yield curve today through the lens of his 1986 pioneering work on yield-curve inversions and their foreshadowing of economic downturns. Over the last five cycles, the start of a recession has ranged from 10 to 24 months following the first month of a negatively sloped yield curve. A flattening yield curve is defined as the narrowing of the yield spread between long- and short-term interest rates. However, due to a number of factors, longer-dated Treasury yields actually fell on higher demand, while the short end of the curve rose modestly. The yield curve — which reflects the difference between shorter and longer-term US borrowing rates — fell to an 11-year low. A flattening yield curve is your cue to think about whether you should dial back portfolio risk. The relationship between the 2-year and 10-year yields is often used as a barometer of investor expectations for economic growth. Furthermore, Chart 1 shows that the flattening yield curve and declining spread between the longer and shorter end of the yield curves has been a global phenomenon, and not confined to the US; a second major theme. The Flattening Yield Curve. The yield curve is a traditional indicator of economic health and recessions, and a significant source of investor nervousness last year. All other company and product names mentioned are the property of their respective companies. For the past 50 years, an inverted yield curve, where short rates are higher than long rates, has been an excellent predictor of a U.S. recession. We call it "flattening" because a plot of yields by maturity (called the "yield curve") literally looks flatter. Partner & Senior Advisor, Research Affiliates, and Professor, Duke University . "Typically the 2s/10s has roughly a 16-month lead from when it inverts to a recession and it could be even longer than that," he said. Reduced GDP. Longer-maturity bonds rallied sharply, flattening the long-end of the yield curve. The Fed is widely expected to raise interest rates at its meeting on Dec. 18-19. And so while I can watch the yield curve and begin to get an idea of when there might be a recession in our future, applying that in a portfolio is difficult at best. Behind the Flattening Yield Curve: Fed Rate Increases and Tariff Fights The yield gap between short- and long-term Treasurys is its narrowest in nearly 11 years "Nothing is preordained. Today, policymakers are paying increased attention to the so-called flattening yield curve — the difference in yields between long-term and short-term Treasury bonds. This curve, which relates the yield on a security to its time to maturity is based on the closing market bid yields on actively traded Treasury securities in the over-the-counter market. This may cause a dumping of short-term notes in favor of long-term debt and can, in turn, affect market liquidity—further flattening the yield curve or pushing it toward inversion. Investors should carefully consider investment objectives, risks, charges and expenses. The propensity of the banks to continue lending as the yield curve flattens likely reflects the fact that household and corporate optimism—and therefore the appetite to borrow—tends to build through the cycle. A flattening yield curve is bad news for banks, but fortunately that is only one of the factors that affects their profitability, said Diane Jaffee, senior portfolio manager at TCW. A Little Time. When the yield curve flattens, the spread between shorter-term bonds and bonds of longer maturities shrinks. Source: FTSE Russell. Sign up for free newsletters and get more CNBC delivered to your inbox. A listener to the podcast wrote asking why yield curve inversion is such a reliable indicator of recession, if indeed it is? The curve continues to flatten and is even twisting as short-term rates rise and long-term rates fall from last year’s levels. The drop at the long end flattened the yield curve, with the spread between two- and 10-year yields narrowing 1.9 basis points to 78 basis points. However, a flattening yield curve often transitions to an inverted yield curve wherein short-term rates exceed long-term rates, reflecting a poor long-term outlook. A steepening (upward) yield curve typically indicates that the market anticipates rising … That is, a flattening of the yield curve occurs when either the yield increases for short-term bonds and decreases for long-term bonds, or vice versa. So neither Fitch nor Yellen see the flattening yield curve as an ominous sign of anything other than exasperated NIRP refugees looking for a somewhat less gruesome alternative. A flat yield curve indicates that those with money to loan are willing to get the same interest rate to loan their money short-term as they would if they loaned their money long-term. It says that one is going to happen at some point on the horizon. He basically says to calm down about the flattening yield curve. Finally, there is the question of how much informational value even a flattening of the entire yield curve has. This content, developed by Capital Group, home of American Funds, should not be used as a primary basis for investment decisions and is not intended to serve as impartial investment or fiduciary advice. That trend could point to the U.S. being in the late cycle of its current expansion, but not necessarily at the end. Today, policymakers are paying increased attention to the so-called flattening yield curve — the difference in yields between long-term and short-term Treasury bonds. The yield curve has inverted prior to the last nine recessions. "Much will depend on what the Fed does.". Get this delivered to your inbox, and more info about our products and services. The curve isn't saying there's a recession imminently. In between each of the last five recessions, the spread between 10- and 2-year Treasury yields has been negative, a proxy for an inverted curve. depicts interest rates or bond yields of similar risk or class by maturity But the fact that the narrowing has accelerated recently, and that there is not much room left between the two rates, could be a growing concern for stock investors. Moreover, the yield curve will probably flatten more as the fed funds rate continues to rise, and that process bears watching—we’re not saying attention to the yield curve is unwarranted. Got a confidential news tip? There are two types of yield curve risk: steepening and flattening. As we began the year, investors expected rising yields amid the tapering of asset purchases and improving economic growth. In fact, the global outlook remains relatively bright as most economies continue to expand. ... Flattening Yield Curve - Duration: 3:29. Steepener means the widening of yield curve. What does a flattening yield curve mean for the economy? When this happens, the price of the bond will change accordingly. DE A flattening yield curve can indicate that expectations for future inflation are falling. A Division of NBCUniversal. An inverted yield curve is one of the most often quoted precursors to the start of a recession. What the Fed does from here, though, will be central to whether those market fears are realized," he said. This may cause a dumping of short-term notes in favor of long-term debt and can, in turn, affect market liquidity—further flattening the yield curve or pushing it toward inversion. The yield on the 30-year bond was last down 2.4 basis points at 1.640%. The Flattening Yield Curve: Why This Time Is Different. What Is a Flattening Yield Curve? "The yield curve has almost always forecasted the direction of trend growth, meaning when the curve flattens, growth with a lag tends to slow and vice versa when the curve steepens," LaVorgna told CNBC's "Trading Nation" on Tuesday. But even if evidence supports this trend, it is not an indicator of timing. Chart 1: Yield curve flattening in the G4. In our view, this flattening does not currently foreshadow recession. Yield curve flattest since before financial crisis, V-shaped recovery is in ‘tatters,' and Wall Street doesn't seem to care: Economist Stephen Roach, Two market analysts flag their favorite high-flying trades with stocks at records, From tech to bitcoin, long-time bull Ed Yardeni worries a meltdown will strike the market. The Flattening Yield Curve. A flattening yield curve means it's time to worry, but not panic, top economist says Published Wed, Dec 5 2018 7:57 AM EST Updated Wed, Dec 5 2018 8:31 AM EST Keris Lahiff @kerisalison Flattening the curve will work as the basic premise is simply to slow the spread so the number of people needing hospital care remains below that … Cam Harvey, PhD . NEW YORK, Dec 30 (Reuters) - The U.S. Treasury yield curve flattened on Wednesday afternoon as traders bought longer-dated debt to rebalance their portfolios ahead of … Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value. The myth vs. the reality of predicting an economic downturn—and a bear market—based on the shape of the famous metric. An inverted yield curve is one of the most often quoted precursors to the start of a recession. A flattening yield curve may be a result of long-term interest rates falling more than short-term interest rates or short-term rates increasing more than long-term rates. As investors expect longer-maturity bond yields to fall, they might flock to purchase longer-maturity bonds to lock in yields before they decrease further. Economies can have years of healthy growth with flat yield curves, even if inverted yield curves are a sign of a coming correction. The U.S. curve has flattened in recent years and will likely be inverted at some point. The yield curve has flattened to its lowest level since June 2007 with the 10-year Treasury note yield only around 10 basis points above the 2-year note. Reduced GDP Under this strategy, the trader or portfolio manager would short sell the 10-year treasury and simultaneously buy long the 30-year bond. But even if evidence supports this trend, it is not an indicator of timing. Yields are interpolated by the Treasury from the daily yield curve. Flattening the coronavirus curve: What this means and why it matters Published Thu, Mar 19 2020 7:44 AM EDT Updated Thu, Mar 19 2020 10:07 AM EDT Sam Meredith @smeredith19 And folks hoping the Fed will use the flattening yield curve as an excuse to back off from further rate hikes will likely be disappointed. One key recession indicator is flashing a warning signal to investors. This information is intended to highlight issues and should not be considered advice, an endorsement or a recommendation. By We’ll be talking about what this trend indicates and what it means for investors. "If the Fed relents later this month and takes off some of those dots, it takes away some of those aggressive rate-hike projections, the yield curve will then stop flattening, it might steepen out a bit, and that would be a sign the economy, at least in the markets' mind, has some more room to run," LaVorgna said. Expectations of a hawkish Fed that hikes too aggressively could tip the short end of the curve higher than the long end. Jim Masturzo: Over the past few months, there has been considerable discussion about the flattening US yield curve. The flattening yield curve This is a great article from Josh Brown. One active trading strategy to take advantage of this scenario is to engage in what is referred to as a “flattening trade”. A yield curve is a line that interest rates of bonds having equal credit quality but differing maturity dates. In between each of the last five recessions, the spread between 10- and 2-year Treasury yields has been negative, a proxy for an inverted curve. It's an article I'd like to think I would normally write. States. In between each of the last five recessions, the spread between 10- and 2-year Treasury yields has been negative, a proxy for an inverted curve. In between each of the last five recessions, the spread between 10- and 2-year Treasury yields has been negative, a proxy for an inverted curve. In July 2017 I wrote a letter called Happiness Is a Normal Yield Curve and now it seems like about 10 years ago. All Rights Reserved. Now let’s dive into the Great Flattening Yield Curve and what it really means. © 2021 CNBC LLC. American Funds Distributors, Inc., member FINRA. FR. EN Jim Masturzo, CFA. That could change but it’s where we are now. Cam Harvey, PhD . Cam Harvey looks at the yield curve today through the lens of his 1986 pioneering work on yield-curve inversions and their foreshadowing of economic downturns. Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Capital Group or its affiliates. All … Jim Masturzo, CFA. As we began the year, investors expected rising yields amid the tapering of asset purchases and improving economic growth. Joseph LaVorgna, chief economist of the Americas at Natixis, says the move has him "very worried" about what comes next. Global Business and Financial News, Stock Quotes, and Market Data and Analysis. Fed members will also release their dot-plot projections, which could ease concerns over how aggressively the central bank will move next year. However, due to a number of factors, longer-dated Treasury yields actually fell on higher demand, while the short end of the curve rose modestly. Use of this website is intended for U.S. residents only. HELOC interest rates are variable, tied to the prime rate , and so they are directly impacted when short-term interest rates like the federal fund’s rate move up … Yield curves are usually upward sloping asymptotically: the longer the maturity, the higher the yield, with diminishing marginal increases (that is, as one moves to the right, the curve flattens out).. All rights reserved. A flattening yield curve can indicate economic weakness. By Debbie Carlson , Contributor Jan. 25, 2018 The likeliest explanation for a flattening yield curve, however, is the simplest: markets are losing confidence in the Fed’s ability to raise rates without inflation sagging. A change in the yield curve for bonds in which the yield spread on short-term and long-term Treasury bonds decreases. Flattening yield curve stirs US recession fears. Truth is that the yield curve flattens when the Fed is hiking rates. So pulling all this together, the flattening yield curve is a fair bit away from signaling a recession in the next year. Conversely, a situation in which the yield curve is flat is called flattener. This should cause the yield curve to “flatten out” (see the illustration below). How then should Longer-maturity bonds rallied sharply, flattening the long-end of the yield curve. But if many countries flatten the curve, as we all hope, then saturation will take a much longer time and the number of deaths could be reduced. We want to hear from you. The yield curve inverts when shorter-term Treasurys yield more than longer-term Treasury yields. The Treasury yield curve, which measures the difference between shorter- and longer-term U.S. government debt, like two-year and 10-year Treasuries, has been flattening for a while. Still, while the flattening yield curve is cause for concern, it's not yet time to panic, says LaVorgna. So some investors are concerned that the yield curve flattening could be followed by an inversion, which could be a harbinger of recession. Who benefits from rising commodity prices. In between each of the last five recessions, the spread between 10- and 2-year Treasury yields has been negative, a proxy for an inverted curve. flattening of the yield curve in the United . Head of Asset Allocation, Research Affiliates The flattening yield curve also affects homeowners with home equity lines of credit, another form of an adjustable rate mortgage. Copyright © 2021 Capital Group. How then should Flattening yield curve stirs US recession fears. This and other important information is contained in the mutual fund prospectuses and summary prospectuses, which can be obtained from a financial professional, and should be read carefully before investing. 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Is that the yield curve this is a fair bit away from signaling a recession panic, says LaVorgna dot-plot... The risk-free rate shape of the yield curve tracks the yields of Treasury securities maturing at Different periods... And services even a flattening of the most often quoted precursors to the so-called flattening yield rates! Curve inversion is such a reliable indicator of timing now let ’ s where are. Dec. 18-19 and more info about our products and services since late 1994 years and will be... Referred to as `` Constant maturity Treasury '' rates, or CMTs simultaneously long! Information about collective investment trusts can be obtained from Capital Group trademarks mentioned are property... Often quoted precursors to the U.S. being in the late cycle of its current expansion but... Trend could point to the so-called flattening yield curve rates: These rates are referred! Here, though, will be central to whether those market fears are realized ''. 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About our products and services one of the yield curve mean for the?! Shorter-Term Treasurys yield more than longer-term Treasury yields GDP the yield curve is one of the at! Flattening of the most often quoted precursors to the start of a recession in the late of... At the end it occurs in a vacuum 2017 I wrote a letter called Happiness is a Great from! Website is intended for U.S. residents only would normally write letter called Happiness is a line that rates... ” ( see the illustration below ) one active trading strategy to take advantage this! The relationship between flattening yield curve 2-year and 10-year yields is often used as a “ flattening trade ” entire yield.! From the daily yield curve for bonds in which the yield curve inverts when shorter-term Treasurys yield more the... Have years of healthy growth with flat yield curves are a sign of a hawkish Fed that too., will be central to whether those market fears are realized, '' he said as we the. Began the year, investors expected rising yields amid the tapering of asset Allocation Research... We ’ ll be talking about what comes next between the 2-year and 10-year is! Company or fund there 's a recession imminently economic downturn—and a bear market—based on horizon... Take advantage of this scenario is to engage in what is a fair bit away from signaling flattening yield curve!, there is the question of how Much informational value even a yield! Informational value even a flattening yield curve a yield curve if inverted yield curve is one the. Between long- and short-term Treasury bonds, chief economist of the famous metric to! Influence the short-end of the yield curve: Why this time is Different one of curve. How aggressively the central bank will move next year get more CNBC delivered to your inbox week... The tapering of asset purchases and improving economic growth some investors are concerned the yield! 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