Maybe it's due to a global savings glut. Or perhaps fear continues to lurk in the hearts of overseas investors, inspiring a constant flow into safe-haven Treasuries in spite of firmer economic activity.
Whatever the explanation, the yield curve data of late looks out of place relative to the state of US economic affairs. Growth has picked up and the near-term risk of a new recession has been virtually nil recently. Yet the conspicuous flattening of the yield curve over the past year suggests that macro danger is approaching.
Perhaps the new reality is that the yield curve has lost its resonance as a business-cycle indicator. That's still a minority view, but it's hard not to wonder why the spread between long and short Treasury yields has narrowed over the last 12 months while the US macro trend has strengthened.
Yields on the short end of the curve have jumped 80 to 90 basis points over the past year through yesterday (Jan 17). Rates for the 5-year through 10-year maturities have inched higher over that period, but only slightly. Indeed, the benchmark 10-year has barely budged. Meantime, 20- and 30-year yields have dipped. As a result, the yield curve generally has become flatter. The spread for the widely followed 10-year/2-year Treasuries, for instance, is just 52 basis points, the lowest in nearly a decade.
This September marks the tenth anniversary of the collapse of Lehman Brothers, which seemed to unleash a dramatic collapse in the stock market and a near meltdown of the global economy. Ten years on, the US economy is humming and so is the global trend. But the yield curve seems stuck in the past, when the ability to shake off the Great Recession's clouds weighed on sentiment far and wide.
Next week's fourth-quarter GDP report is expected to post a healthy 3.0% gain, according to median forecast via CNBC's Jan. 17 survey of Wall Street economists. If correct, the US economy is on track to expand at a 3%-plus quarterly pace for a third time. The Q4 estimate equates with 40% improvement in growth for the cumulative increase for the trailing three quarters vs. the year-earlier period. Compared with the last three quarters of 2015, last year's final three quarters are set for a 94% acceleration in growth.
