I include a chart of the Treasury Yield Curve in every Control Panel post.
The Dynamic Yield Curve chart published by StockCharts.com has the feature of showing the history of the yield curve over the past 25 years. The left-hand chart shows the yield curve. The right-hand chart shows the SPX. The vertical red line on the right side of the SPX chart can be moved to the left. As the red line moves the Treasury yield curve responds.
I have spent hours studying the yield curve over the years in addition to the detailed charts of the fed funds rate and the 10 year Treasury available from the Federal Reserve.
Itâs typical for the yield curve to have a positive slope during economic expansions. (That is, longer-dated Treasuries have higher yields than shorter-dated Treasuries.) During recessions, the yield curve typically has a negative slope.
The Federal Reserve typically raises the fed funds rate during expansions to prevent inflation from rising out of control. Eventually, the cyclical economy goes into recession. Long-term bond yields fall faster than the Fed cuts the fed funds rate which results in a negative slope of the yield curve. This is easily seen in the chart of the 10-Year Treasury Constant Maturity Minus 3-Month Treasury Constant Maturity.
Typically, the Fed then cuts the fed funds rate fairly quickly but the long-term bond yields continue to fall even as the curve reverts to a positive slope.
Currently, this pattern is not happening. Remember that the price of a bond moves inversely to its interest rate. A âbond selloffâ means that interest rates are rising.
A Bond Selloff Is Rocking the World. You Might Want to Take the Other Side.
A rare âbear steepeningâ trade is pressuring governments and worrying investors
By Jon Sindreu, The Wall Street Journal, Updated Jan. 12, 2025
Wall Street is really worried about bonds. It might be time to buy someâŚ
What is spooking markets, however, is that much of the recent rise in yields doesnât appear to reflect expectations of stronger economic growth. Rather, it might be the result of investors applying a higher discount or âterm premiumâ to hold long-term bonds, estimates by the Federal Reserve suggest. Some analysts attribute this to the possibility of Donald Trumpâs promised tariffs derailing the global economy and leading to a jump in inflation, while his tax cuts bloat budget deficits furtherâŚ
The reason alarm bells are ringing is that longer-term bonds have sold off even moreâa âbear steepeningâ trade, in Wall Street lingo. Three out of four times, yield curves steepen for the opposite reason, historical data shows: A fall in short-term yields driven by central banks cutting rates very fast. Bear steepenings following a period of inverted yield curves are rare, and mostly are reminiscent of the âstagflationâ periods of the 1970s and 1980sâŚAfter years of technology-led rallies, the S&P 500 has become so expensive that, even if analystsâ optimistic outlook for 2025 is realized, its one-year forward earnings yield has fallen to 4.6%âthe same as the yield of a 5-year Treasury.⌠[end quote]
The economy is growing well at a sustainable rate. The Atlanta Fed, the Bureau of Labor Statistics and the Institute for Supply Management (ISM) all issued strong reports last week. (Links below.)
As a result, the options market now predicts at most 2 cuts in the fed funds rate in 2025, instead of the 4 cuts they were predicting in September 2024. As we have seen before, the stock market is having a minor hissy fit. The Fear & Greed Index is in Fear.
The Wall Street Journalâs editorial board published a harsh opinion piece criticizing the Fed for âprematurelyâ cutting the fed funds rate when inflation is still above their goal and the economy shows no sign of suffering from the current fed funds rate.
The stock market is still in a bubble. Iâm not the only one who thinks so â see the links below.
For the truly risk-averse, there will be an auction of the 10 year TIPS in a few days. Orders can be placed with Fidelity at no charge. The expected yield is historically high.
The METAR for next week is cloudy. The stock market will probably be unsettled but not dangerously. The bond market will probably continue its trend of higher interest rates.
Wendy
