At that time, yield spreads were more than 10 basis points wider from 2 to 10 years, as well as from 5 to 30 years.
Of course, a pullback could happen at any time. BMO Capital Markets strategists, who have remained firm on their forecast that the yield curve will invert in 2018, said in a note Tuesday that there could very well be “a tactical bump steeper as momentum is exhausted.”
Yet trading flows Wednesday indicated lasting wagers on narrowing spreads. For the second day in a row, a put option on the 30-year Treasuries futures contract was heavily sold, a sign of confidence that long-end yields won’t rise much. And a large block trade helped push the curve from 5 to 30 years below 30 basis points, through a key level highlighted by BMO.
Small Comfort
That’s not much comfort for investors positioned for continued economic expansion. After the yield curve from 3 months to 10 years inverted in January 2006, it took less than two years for the Great Recession to begin.
A truly inverted curve “is a powerful signal of recessions” that historically has occurred “when the Fed is in a tightening cycle, and markets lose confidence in the economic outlook,” John Williams, the next president of the New York Fed, said Tuesday. He said that’s not the case now.
He has a point. The curve is collapsing partly because the Treasury is ramping up issuance of shorter maturities to fund expanding budget deficits.
Yet the curve from 5 to 30 years is approaching unprecedented territory. It’s on pace to flatten for nine straight sessions. The spread has only narrowed 10 consecutive times on a few occasions.
“The yield curve can’t flatten every day,” said Jim Vogel, a strategist at FTN Financial Capital Markets. “But it certainly seems willing to try.”
This article was provided by Bloomberg News.