Richard Turnill — What a Flattening U.S. Yield Curve Means

The flatter yield curve is not a recessionary signal, so what is it telling us? Much of this year’s earlier yield curve flattening represented a reversal of the 2016 steepening that accompanied surging economic growth and inflation expectations after the U.S. presidential election. Markets had bet that fiscal stimulus and infrastructure spending would spur growth and inflation. Long-term yields jumped in response. Those market expectations unwound over the course of 2017 when policy changes were slow to materialize and weak inflation readings became the big surprise. Persistent demand for long-term Treasuries pushed 30-year yields lower even as short-term rates rose. We could see long-term Treasuries rising a bit from here—but expect low-trend growth, plentiful global savings seeking income and other structural factors to keep them historically low. Our outlook for growth and inflation supports our preference for equities, including cyclicals—despite the flat yield curve. Within U.S. fixed income, we like Treasury inflation-protected bonds over nominal government debt.

EconMatters
What a Flattening U.S. Yield Curve Means
Richard Turnill | global chief investment strategist at Black Rock