Yield Curve Update: A New Kind of Bad Economic News
Photo by Scott Beale via Wikimedia Commons
Ever since Trump announced his trade war and Wall Street goliaths like J.P. Morgan and Goldman Sachs said that they did not price Trump’s signature policy into their market expectations, the yield curve has been the main event to watch in the markets. The stock market gets all the hype in our vacuous mainstream media, but anyone with any passing knowledge of markets knows that the bond market is where the smart money resides. The largest, most liquid market in the world is for U.S. government debt—the Treasury Bond market—and yields (interest rates) on Treasuries are telling a pretty harrowing story about the U.S. economy right now.
The first week that the market adjusted its expectations for a world where Trump makes everything more expensive, returns on the yield curve inverted. This is as loud and clear a signal as the bond market can send, as it means it is concerned about high inflation in the short-term, and low growth in the long term. Another way to interpret an inverted yield curve is as perhaps the most classic harbinger of a coming recession.
But since that first inverted week, yields on Treasuries have been all over the place. Over the last week, they have all plummeted, which may be an even more worrying sign than an inverted yield curve. The reason that yields across the board would plunge is simple: expectations for growth have fallen way off, and the explanation for why is blatantly obvious, as the New York Times noted.
A measure of corporate activity from S&P Global published last week showed business expansion slowing in the United States in February as a result of “uncertainty and instability surrounding new government policies” such as federal spending cuts and tariff-related developments.
The housing market is also feeling pressure. The National Association of Homebuilders said in its latest report that builder confidence had fallen to a five-month low because of concerns about tariffs, elevated mortgage rates and high housing costs.