Authored by Simon White, Bloomberg macro strategist,
After relentlessly flattening and experiencing one of the deepest inversions for decades, there are mounting signs the yield curve has bottomed.
The yield curve gets a lot of air time these days. By now, every man and his dog knows that its inversions precede recessions. But there is too much variance in the length of time until the recession starts for that knowledge to be of much practical use. Of more utility is when the yield curve begins to steepen, as this typically happens when a downturn is much nearer at hand.
This steepening trend in certain key parts of the yield curve over the last few weeks increasingly looks like it has legs. The 3m10y has been rising since mid-January. This is all the more notable given it has not re-flattened even in the face of the Fed recently amping up its hawkish “OMOs” (open-mouthed operations).
The term premium versus the 3m10y curve has recently gone back below zero. This has historically preceded curve steepening, with it rising 8, 17, and 32 bps over the next three, six and 12 months (this is significantly greater than the mean change of the 3m10y curve over the whole period).
Of even more significance is the 3m30y curve.
This curve typically begins to steepen first before a recession, ahead of the more closely watched 3m10y, 2y10y, 5y30y, etc. curve segments.
3m30y has been steepening since mid January, the longest period without making a new low since it peaked last May.
Given this part of the curve on average begins to steepen approximately five months before the onset of a recession, this could mean a downturn begins as early as June.
It’s safe to say, especially given recent optically buoyant economic data, this is not what the market, or the Fed, currently expects. The yield curve may be the sign that says a “no landing” is off the cards.
