It’s not a black diamond ski run yet, but the yield curve for U.S. Treasuries is steeper than it has been in a while.
A yield curve is the line on a graph showing yields for different maturities of bonds. Yield curves provide insight to bond investors’ perceptions about the economy. There are four basic types of yield curves:
- Normal: The slope is upward because short-term bond yields are lower than long-term bond yields. A normal curve for U.S. Treasuries has a yield gap of about 2.3 percent between 30-year Treasury bonds and 3-year Treasury bills, according to Fidelity. On Friday, the difference was 1.78 percent.
- Steep. The upward curve is unusually steep. This may occur when an economic expansion is underway, demand for capital pushes interest rates higher, and inflation rises.
- Flat: There is no curve because short- and long-term bonds have similar yields. Flattening yield curves can be a precursor of economic slowdown and lower interest rates.
- Inverted: The curve slopes down. Long-term bond yields are lower than short-term bond yields. Some believe an inverted yield curve is a signal that recession is ahead.
Right now, the steepening of the U.S. Treasury yield curve is positive news, according to a source cited by Ben Levisohn of Barron’s:
“Historically, [a steepening yield curve is a] good sign for both the economy and stock markets…But it is also an early warning sign that the clock is ticking on how long the Fed will remain on hold, or easy, before beginning to hike rates and tighten financial conditions to combat the threat of runaway inflation.”
Inflation concerns were part of last week’s debate over the size of the pending stimulus. If stimulus is too small, economic growth and jobs recovery may falter. If it’s too big, the economy may overheat and inflation could become an issue, according to economist Lawrence Summers in The Washington Post.
Judging by January’s anemic jobs report, it could be a while before the economy runs too hot.
The Bureau of Labor Statistics reported 49,000 jobs were created last month. At that rate, it would take a very long time for the economy to recover the jobs lost in 2020. The pace of hiring is expected to accelerate as more Americans get vaccinated and new stimulus is distributed, reported Matthew Klein of Barron’s.
Major U.S. stock indices finished the week higher.
photo by: US Yield Curve © Dani3315 | Dreamstime.com