Positively Sloped US Yield Curve Currently At Variance With History
US economic expansion will become eight years old next month. Meanwhile, the Federal Open Market Committee’s (FOMC) task of sustaining growth has been complicated by the arrival of a pro-growth agenda, courtesy of the Trump Administration.
Economic forecasting, particularly labour market dynamics, becomes more difficult at advanced stages of economic cycles, thereby raising the risks of a policy mistake. Uncertainty about the timing of the Trump Administration’s tax cuts is weighing on the reflation trade and could adversely impact equity valuations.
Current FOMC economic and financial projections suggest the arrival of an inverted yield curve in 2018 Q4. Current conditions are, however, at variance with history, whereby short-term interest rates have usually been more volatile than their long-term counterparts.
Historically, the US yield curve has been inverted when the economy has reached full employment. The current positive slope is, therefore, at variance with historical experience, given low levels of unemployment and inflation, and this is forcing the FOMC to be patient with planned interest rate increases.
The US corporate bond market continues to benefit from yield hungry foreign investors, particularly European.Historically, overseas investors have entered US equity bull markets at late stages, thereby raising the spectre of a repeat performance in the US corporate bond market.
DeSaque Macro Research Limited was formed by Said DeSaque in April 2012 with the intention of delivering independent global macro investment insights and new thematic long-term ideas to investors, along with an agnostic opinion of the markets.
Said DeSaque has over 29 years of experience working as a professional economist in financial services, primarily based in London. His working role has involved extensive travel around the world, bringing him into contact with investors of different cultural backgrounds and investment requirements. Prior to establishing DeSaque Macro Research, Said held positions as Senior Economist and Investment Strategist at US banks Robert W Baird and William Blair. He began his career as a graduate at PaineWebber in 1986, where he became Head of the London Economics Department in 1996. This role allowed him to engage with senior investment professionals, alongside regulators and provided a unique perspective of market intelligence at work.
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