Different types of steepness

In one chart below, you’ll see the amazing 10 fold rise and steepness of the U.S. 2 year bond yield. It’s obvious that the market has factored many Fed rate rises.

I think it is factoring in too many and perhaps the market is concurring with the predictions of 6, 7 or 8 rate hikes.

The other chart shows the yield curve inverting for a whole 2 days. That’s hardly long enough to signal a recession, but since then it has steepened to 0.35%.

It has occurred because the front end of curve (2 years) has declined from 2.59% to 2.35% faster (‘greater’) than the 10 year yield.

This bullish steepener is good for equities.

I’m looking for the spread to initially visit 0.40%

It tells us that inflation may be peaking, which is my belief.

And it tells us that the market is considering that the Fed may not aggressively in raise rates as the market participants have previously hinted.

My position is that the Fed may hike 2 or 3 times and then cut once for they may have gone too far.

April 14, 2022

by Rob Zdravevski

rob@karriasset.com.au