Investors reportedly are split on the meaning of a key bond market barometer for economy and the question of whether trillions of Fed dollars could have possibly warped a market warning sign.
The gap between short- and long-dated Treasury yields fell to a fresh 10-year low this week, extending the trend that has dominated the world’s largest bond market for weeks, Bloomberg reported. One reason the flattening dynamic has room to run is a shift in asset allocation among money managers in favor of long-dated Treasuries, according to a growing chorus of strategists.
While analysts have long considered the gap, known as the yield curve, a key barometer for the health of the economy, many are split about what the signal means now, The Wall Street Journal explained.
“Much of their disagreement is rooted in the exceptional conditions of the past decade: emergency measures from global central banks that have produced little inflation, unemployment falling with few signs of wage pressure and stock markets that continue to climb with little volatility,” WSJ.com reported.
Today’s flattening comes even as the economy seems to be humming along, sending an unclear signal at a time when stocks keep pushing to fresh records in a rally propelled by signs of synchronized global growth, and fueled recently by hopes that U.S. tax cuts can provide a further boost.
On a fundamental level, the flattening trend makes sense, with the Federal Reserve raising short-term interest rates in the face of stubbornly low inflation. It also helps that the Treasury plans to issue more shorter-term debt, rather than long bonds, Bloomberg expxlained. Yet at the same time, it’s unlikely that Fed officials will want to quickly bring about an inverted curve, which has historically signaled an impending recession.
“The markets are pushing back against the Fed,” said Michael Collins, a senior portfolio manager with PGIM Fixed Income, which has placed trades that will profit if the gap shrinks. If the central bank continues to raise interest rates, “the yield curve is going to get flat, stocks are going to sell off and the economy’s going to get hit,” he told the Journal.
To Morgan Stanley’s Matthew Hornbach, the flattening Treasury yield curve has a lot in common with the surging price of bitcoin, Bloomberg reported.
For both trades, the best option is to simply buy the dips, Hornbach, global head of interest-rate strategy, wrote in a Nov. 18 note. He recommends adding to bets that the yield spread between two- and 30-year Treasuries will continue to narrow, even though it fell to 104 basis points Monday, the lowest in 10 years. He says the curve could flatten to as low as 80 basis points by year-end, based on Fibonacci projections.
“Trading the flattener should feel very much like trading bitcoin: you’re meant to buy every dip, if you see the value proposition, even though you’ve already missed what seems like a big move,” Hornbach wrote.
(Newsmax wire services contributed to this report).
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