The fate of the flattening U.S. yield curve now rests squarely in the words of Federal Reserve officials.
Bond traders have already reached their verdict. The yield spread between 5- and 30-year Treasuries narrowed last week to as little as 26.2 basis points, the lowest since August 2007. The prospect of an inverted curve, which has presaged past recessions, is as strong as ever. And it’s not just Wall Street scrutinizing the development — St. Louis Fed President James Bullard on Friday said it’s “crunch time” for inversion, predicting it could happen later this year or in 2019 if the Fed keeps up its pace of rate hikes.
Several more central bankers will have a chance to opine on the phenomenon this week, including incoming New York Fed President John Williams, while the nominee for Fed vice chairman, Richard Clarida, will face Congress. What they signal may prove pivotal in a period otherwise lacking in debt auctions and top-tier data.
Any hints that the looming inversion has them contemplating a slower pace of rate increases could spur another bout of bull steepening, like after policy makers’ May meeting. If they ignore the curve, there’s little to stop the grind flatter.
‘Down the Drain’
“The Fed is supposed to adjust rates when the economy is doing well and inflation may pick up, but at some point they would have to stop,” Krishna Memani, chief investment officer at OppenheimerFunds Inc., said in a Bloomberg TV interview. But if they let the curve invert, “all they will do is take the U.S. economy down the drain.”
It’s hard to overstate the flattening move in the U.S. yield curve. Select just about any two maturities, and the gap between them has shriveled over the past year.