The Flattening US “Yield Curve”? NIRP Refugees Did it, by Wolf Richter

Is a flattening yield curve signalling an impending recession. From Wolf Richter at wolfstreet.com:

Sez Fitch & Yellen

US Treasury securities are doing something that is worrying a lot of folks, including Fed Chair Janet Yellen: While short-term yields are rising in line with the Fed’s hikes of its target range for the federal funds rate, longer-term yield have done the opposite: they’ve been declining. This has flattened the “yield curve” to a level not seen since before the Financial Crisis.

This chart shows the yield curve of today’s yields (red line) across the maturity spectrum against the yields of exactly a year ago, after the rate hike at the time. Note how short-term yields on the left have risen in line with the rate hikes, while toward the right of the chart, long-term yields have fallen:

When long term yields fall below shorter term yields, the curve becomes “inverted.” This has been a reliable predictor of a recession or worse. And we’re getting closer. Today, the 10-year yield closed at just 0.53 percentage points above the two-year yield. This is the narrowest spread since August 2007.

However, in her post-FOMC-meeting press conference yesterday – where this conundrum came up hard and heavy – Yellen cautioned that “correlation does not imply causation.”

An inverted yield curve these days doesn’t necessarily cause a recession, she said. An inverted yield curve is itself a product of various factors. And one of those factors is heavy buying of long-dated US Treasuries by investors in countries on which central banks have inflicted their negative-interest-rate policies – the ravaged NIRP refugees hailing from Europe and Japan.

There are a lot of them, and they’re having an increasingly large problem that is only going to get worse next year – regardless of what the ECB will or will not do.

Fitch Ratings estimates that the total amount of global negative-yielding government debt is $9.7 trillion, with Japanese government debt accounting for $5.8 trillion and European government debt for $3.9 trillion.

To continue reading: The Flattening US “Yield Curve”? NIRP Refugees Did it

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