You Know It’s Late In The Cycle When The Yield Curve Starts Generating Headlines

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by John Rubino, Dollar Collapse:

The yield curve is one of those indicators that most people have heard of but few can explain. In part this is because it’s usually a non-issue, only becoming important enough to argue about during the final year of long expansions.

Like now:

Yield curve flattening maintains relentless momentum

(MarketWarch) – The yield curve flattened this week after the Fed minutes suggested that the December rate increase was a near-certainty, even as senior central bankers held concerns about lackluster inflation. The yield curve refers to the line drawing out a bond’s yield and its respective maturities, with a flatter slope signifying weaker growth outlook.

The spread between the 2-year yield and the 30-year yield, one gauge of the curve’s steepness, narrowed to 0.60 percentage point, the tightest span in a decade.

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Yield Curve Carnage Continues

(Zero Hedge) – The US Treasury yield curve collapse continued its unending path to inversion overnight with 2s10s plunging to sub-60bps and 5s30s hits a 65bps handle for the first time since Nov 2007.

2s10s has flattened for 3 days straight, 6 of the last 7 days, and 14 of the last 17 days to a 58bps handle…

 

As a gentle reminder to all those hrugging this off, BofA reminds that in seven out of seven occasions in the last 50 years an inverted yield curve has been the prelude to recession.

In fact, the last four times the US yield curve was at these levels, the US economy was already in recession.

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Why The Treasury Curve Has Been Flattening Like A Pancake: Pension Fund Buying And Tax Reform

(Zero Hedge) – Currently, the top corp tax rate in the US is 35%. It looks most likely that rate will drop to 20% when tax reform passes. If you are a corp with an underfunded pension fund, you get a tax incentive to fund the pension THIS YEAR vs in the future when the corp tax rate drops to 20%. Why? Because contributions to the pension plan are tax deductible. You get a bigger tax deduction in 2017 then you will get in 2018 and onwards (assuming tax reform happens in something close to its current form…which it looks like it will).

Multiple primary dealers have reported pension buying in the 30yr sector over the past month, and coincidentally, 30yr bonds have rallied while the front end has sold off for the past month. Pension funds have a favorite bond to buy…STRIPS (30yr zero coupon bonds – higher yield than normal coupon bonds, better asset/liability match..more price sensitive to changes in yield…bigger bang for your buck in a bond rally..and is a flattener to the yield curve). Pension funds don’t trade very much….they tend to buy and hold.

So these flows will SIGNIFICANTLY flatten the 30yr curve…and that is exactly what we have been seeing.

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