Just When You’ve Thought You’ve Seen It All

I could understand it if its track record was spotty, or partially mixed. But the level of denial runs deep and wide with the yield curve. There is a growing chorus of nonsense, really, which is attempting to spin the flattening as some kind of benign technical rotation that through illogical convolution equals the opposite of what is obvious.

Let’s start in the right place with the premise that a flattening yield curve doesn’t necessarily mean recession. There is an unhealthy obsession with curve inversion, though one that is at least rational (relative to all this) in its basis. The problem lies in thinking that a turn in the business cycle is the worst case, and so it might be incumbent upon good analysis to look for it.

The worst case is instead, as we all should easily appreciate, the complete lack of any business cycle. This is truly where so much confusion reigns; if you believe the binary recession/not recession model of the economy then the world just doesn’t make much sense, the bond market least of all.

It has left the mainstream groping for some kind of answer where the yield curve can be simply negated. Two weeks ago, Bloomberg said it was, get this, record high stock prices:

With the S&P 500 Index hitting another record, and year-end only weeks away, pension funds and investors committed to a balanced portfolio may want to lock in equity gains and add fixed-income, according to Deutsche Bank. Of course, it’s not exactly an ideal time to be purchasing 30-year Treasuries either — they yield 2.75 percent, down from as high as 3.21 percent in March. But the duration at least serves as a hedge if the stock-market rally comes to an end.

In other words, the big money managers are just hedging a little for how awesome everything is. Not only that, the comfort that might come with thinking buying at the long end is because of this has been met by equally peaceful selling at the short end. Allegedly. Also from Bloomberg: