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The Yield Curve Is Flattening? Don’t Think So
A flattening yield curve may be a thing of the past if Oil has any say. Much has been over the past couple of weeks about the spreads between the 10-year yield minus 2-year yields contracting. In fact, some are evening worry it may forecasting a recession.
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The forces causing the yield curve to two flatten is two-fold: The Fed is the first reason, and a global market that has no yield is the second. The Fed raising rates are causing rates on the short-end of the curve to rise, while international markets offering low yields are causing foreign buyers of bonds to flock to our longer-dated bonds.
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As of the end of September, the spread between US 10-year and the German 10-Year was nearly 2 percent a level not seen since late 1980’s. We can see the spread now stands around 2 percent.
The same effect has taken place versus the Japanese 10-year yield as well.
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Low Inflation
One reason why this has been able to happen is that inflation has been relatively stable. Foreign investors feel comfortable buying US debt, without the fear of the yields falling behind the inflation rate.
The producer price index on a y/y basis has been relatively tame since 2012 and has been pretty much around zero or negative until this past year. We have seen the PPI begin to rise again in recent months.
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Oil
When we look at the price of Oil on y/y percentage change basis, we can see that PPI follows Oil very closely. The charts look nearly identical, and part of the reason for the rise in PPI in 2017, was because Oil had increased so much off the lows in 2016. Now Oil is starting to rise again, and that could push PPI up even higher, perhaps over 5 percent on y/y basis.
Yields To Go Higher
If that should happen, we will see the yield curve begin to widen, and the fears of the flattening yield curve would turn to concerns about runaway inflation, perhaps pushing yields on the US 10-year above 3 percent in 2018.
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The chart below shows how the 10-year has been consolidating sideways over the past year, and has formed a symmetrical triangle. The current pattern is supportive of yields breaking out and heading higher.
Have a great night, and Happy Thanksgiving!
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Tags: #Oil #yields #yield #curve #flattening #spread
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Charts used with the permission of Bloomberg Finance L.P. This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. Mr. Kramer is not affiliated with this company and does not serve on the board of any related company that issued this stock. All opinions and analyses presented by Michael Kramer in this analysis or market report are solely Michael Kramer’s views. Readers should not treat any opinion, viewpoint, or prediction expressed by Michael Kramer as a specific solicitation or recommendation to buy or sell a particular security or follow a particular strategy. Michael Kramer’s analyses are based upon information and independent research that he considers reliable, but neither Michael Kramer nor Mott Capital Management guarantees its completeness or accuracy, and it should not be relied upon as such. Michael Kramer is not under any obligation to update or correct any information presented in his analyses. Mr. Kramer’s statements, guidance, and opinions are subject to change without notice. Past performance is not indicative of future results. Neither Michael Kramer nor Mott Capital Management guarantees any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment commentary presented in this analysis. Strategies or investments discussed may fluctuate in price or value. Investments or strategies mentioned in this analysis may not be suitable for you. This material does not consider your particular investment objectives, financial situation, or needs and is not intended as a recommendation appropriate for you. You must make an independent decision regarding investments or strategies in this analysis. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Before acting on information in this analysis, you should consider whether it is suitable for your circumstances and strongly consider seeking advice from your own financial or investment adviser to determine the suitability of any investment.