Daily Commentary BY THE CURVE TEAM –

What’s Coming?

18th of April, 2018

Interesting comments out of the Fed regarding the shape of the yield curve

The markets have been trading at low volumes for the duration of this week so the key news for us overnight came from John Williams, who is next to be the top man at the NY fed.

Williams played down the risk of the yield curve becoming inverted. An inverted yield curve is the opposite of the normal yield curve shape, where in normal conditions, longer-term interest rates are higher than short-term rates due to the maturity-risk premium. The maturity-risk premium is the extra margin over short-term rates that an investor receives as compensation for holding a security for a length of time.

A normal yield curve or upward-sloping yield curve is an indicator of a strong economy, and an inverted yield curve is essentially the opposite.

As we know historically, inverted yield curves are a powerful sign of upcoming recession. However, Williams said in his address yesterday;

“The flattening of the yield curve that we’ve seen is so far a normal part of the process, as the Fed is raising interest rates, long rates have gone up somewhat — but it’s totally normal that the yield curve gets flatter”

Williams said real recession risk is where the Fed is in a tightening cycle and markets have lost confidence in the economic outlook at the same time. The Fed may well be in a tightening cycle but the market seems to remain confident in the economic outlook. Whether Trump has a part to play in the market’s confidence will remain to be seen. The geopolitical tensions with China and Russia don’t help the cause.

James Winder

Associate Director