Wednesday, August 1, 2012

2s 10s spread

The Fed is set to speak again today and chatter of new stimulus has been picking up in recent weeks.  While it's been over a year since our last round of pure QE ended, we have been living in an operation twist world since last September, and can expect to continue to live in one through the end of the year at least.

While the effectiveness of twist on the economy is debatable, it's clear that the program has had a real effect on the steepness of the yield curve.  After reaching an all time steep level mid last year, the spread of the 10 yr vs. the 2 yr has been collapsing since.  In a typical economic cycle, recession would be about a year out now, and typically that would be accompanied by an inverted yield curve.  

Currently we are about one year into a flattening curve and if the pace continues we could be inverted by this time next year.  The question is, if 2 yrs are anchored at 0.25%, does that mean that the 10 yr could get that low?


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