Talk to a representative today about our services that we offer and perform

Waking Up the Yield Curve

The Federal Reserve (Fed) heard the market’s alarm and shifted its stance, but the U.S. yield curve hasn’t woken up yet.

As shown in the LPL Chart of the Day, the spread between 2-year and 10-year Treasury yields has hovered around 15 to 20 basis points (bps) (.15-.20%) over the past few months, the lowest level since 2007.

Tightening Fed policy and muted growth and inflation expectations have driven yield curve flattening amid rising interest rates the past few years, a shift known as a “bear flattener” that isn’t necessarily ominous for U.S. economic potential. However, stagnant longer-term yields at the end of last year increased speculation that the Fed’s gradual rate tightening plans could derail the expansion. After all, an inverted yield curve (or long-term rates falling below short-term rates) has preceded each of the nine recessions going back to 1955.

Now, the Fed has promised patience in deciding on future hikes, but the yield curve remains historically flat. Short-term rates have settled into a range that aligns with a Fed pause: The 2-year yield has closed within 10 bps (.10%) of the upper-bond fed funds rate for 31 straight days, the longest streak since 2013. However, 10-year yields have fallen into their smallest year-to-date range since 1974, even as market expectations and data point to rising inflation.

“We see the stall in long-term rates as a clash between steady economic growth and rising inflation expectations on one hand, and higher global demand amid lower yields in other major regions on the other,” said LPL Research Chief Investment Strategist John Lynch. “However, we think sound economic fundamentals will eventually prevail over global uncertainty.”

We expect the 10-year yield to end 2019 in a range of 3-3.25% as growth stabilizes and inflationary pressures continue to rise. We wouldn’t be surprised to see the 2-year yield climb slightly if stronger growth forces the Fed to implement one hike in the second half of the year. Based on our forecast, we’d expect to see 25-50 bps (.25-.50%) in steepening through the end of the year.

Even if the yield curve inverts, an economic recession isn’t necessarily imminent. Since 1970, a recession has started an average of 13 months after the 2-year yield and 10-year yield spread fell into negative territory.

IMPORTANT DISCLOSURES

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. The economic forecasts set forth in this material may not develop as predicted.

All indexes are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. All performance referenced is historical and is no guarantee of future results.

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.

This research material has been prepared by LPL Financial LLC.

To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial LLC is not an affiliate of and makes no representation with respect to such entity.

The investment products sold through LPL Financial are not insured deposits and are not FDIC/NCUA insured.  These products are not Bank/Credit Union obligations and are not endorsed, recommended or guaranteed by any Bank/Credit Union or any government agency.  The value of the investment may fluctuate, the return on the investment is not guaranteed, and loss of principal is possible.

Member FINRA /SIPC

For Public Use | Tracking # 1-831122 (Exp. 03/20)