Yield Curve 101.
A Primer on how the yield curve works.
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A Primer on how the yield curve works.
Thread.
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When the yield curve flattens and eventually inverts, you notice.
But itβs when a recession hits, the Fed cuts rates and the curve steepens that you become you have to worry.
Yield curve dynamics represent a crucial macro variable to understand.
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But itβs when a recession hits, the Fed cuts rates and the curve steepens that you become you have to worry.
Yield curve dynamics represent a crucial macro variable to understand.
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An inverted yield curve often leads towards a recession because it chokes real-economy agents off with tight credit conditions (high front-end yields) which are reflected in weak future growth and inflation expectations (lower long-dated yields).
But there is more...
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But there is more...
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There are 4 main yield curve regimes to consider:
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Bull Flattening = lower front-end yields, flatter curves.
Think of 2016: Fed Funds already basically at 0% and weak global growth. Yields stay put at the front-end and could meaningfully move lower only at the long-end, hence bull-flattening the curve.
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Think of 2016: Fed Funds already basically at 0% and weak global growth. Yields stay put at the front-end and could meaningfully move lower only at the long-end, hence bull-flattening the curve.
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Bull Steepening = lower front-end yields, steeper curves.
2019: Powell turned very dovish, announcing the Fed was ready to cut rates and stimulate the economy.
Front-end yields dropped, and the curve steepened reflecting upside for future growth and inflation.
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2019: Powell turned very dovish, announcing the Fed was ready to cut rates and stimulate the economy.
Front-end yields dropped, and the curve steepened reflecting upside for future growth and inflation.
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Bear Flattening = higher front-end yields, flatter curves.
2022 was the bear flattening year: Powell raised rates, but he ended up choking the economy off.
This was reflected in lower future growth and inflation expectations at the long-end.
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2022 was the bear flattening year: Powell raised rates, but he ended up choking the economy off.
This was reflected in lower future growth and inflation expectations at the long-end.
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Bear Steepening = higher front-end yields, steeper curves.
The comeback of term premium in late 2023: as Fed Funds at 5% didn't slow the economy much, investors demanded a higher compensation at the long-end for a ''this time is different'' scenario.
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The comeback of term premium in late 2023: as Fed Funds at 5% didn't slow the economy much, investors demanded a higher compensation at the long-end for a ''this time is different'' scenario.
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Rapid changes in the shape of the yield curve when growth is at turning points are a key variable to consider for a successful asset allocation process.
Here is a Yield Curve Cheat Sheet you can use:
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Here is a Yield Curve Cheat Sheet you can use:
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Macro volatility is set to remain evelated, and understanding yield curve dynamics is crucial.
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P.S. I am launching my Macro Hedge Fund - if you want to chat with me, feel free to use this link:
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