Equities are rallying, the FED looks like it wants to hike 3 times this years: good times are here again thanks to President Trump. However, the US Treasury yield curves continue to flatten.

The yield curve is an interesting indicator of the bond market’s perspective of medium to long term growth expectation of the economy. Growth is inherently inflationary and leads to higher rates as there is more competition for capital as Central Banks raise rates. A flattening yield curve implies more trouble ahead for the economy, while an inverted yield curve signals a recession approaching.

Yield Curves

The 10-2 year yield curve climbed from a summer low of ~70 bps, rising to as high as 140 bps post election, but has retreated to a spread of 120 bps in spite of higher equity markets and improved expectation of Trump policy. Even more interestingly, the 30-5 year spread has continued to trend lower, seemingly unaffected by any election sentiment, approaching the re-test of relative lows reached in 2015.

The main driver behind these moves has been a more hawkish FED which has pushed up expectations of rate hikes. It looks like long-term bond investors have been fading these moves as bad for long-term growth, which I believe is correct.

The issues in the US economy are largely structural, due to global competitive pressures, technological innovation, demographics and weak productivity growth, which no amount of Trump policy will be able to correct.