The 2-10 Yield Curve And The Shape Of Things To Come

A yield curve inversion suggested a future recession last August, but a steepening yield curve now suggests a strong recovery after a horrendous few months.
The steepening curve could also be explained by a disorderly rush to cash, but its persistence and orderly increase at all maturities suggests a deeper cause.
As unique and frightening as the current economic situation is, it conforms closely to past patterns in which the Fed fights a downturn along with fiscal stimulus.
This likely is the final moment of the 40-year bond bull market, and the stimulus and Fed intervention may signal a return toward long term norms for growth and rates.
Don't fight the Fed. It's undefeated.
The wisdom of crowds is on regular display in the behavior of the stock and bond markets. It is an old financial markets axiom that the bond market is the smarter crowd, the more precise and less excitable. There are a few reasons for this, including the fact that bonds are higher on the capital structure of companies than stocks, are essential to governments at all levels, and generally are more deeply connected to the actual functioning of the economy than the after-market in stocks - the thing we like to call "the stock market."
The stock market, in this view, is less indispensable to the world of business, with serious importance mainly to pension funds and the individuals who build their own pensions via 401Ks. The bond market is the realm of ice cold number crunchers and a few astute value investors like Howard Marks, who looks exactly what he is, a top-notch wonk. These are serious people, and the world they live in is generally rational. The bid-offer spread is generally small and the rate of change is glacial.
That's exactly how the bond market behaved until a couple of weeks ago when the world began to grasp the implications of the coronavirus. Stocks went down, of course, almost instantly and then relentlessly, a flash crash on a daily basis. The bond market... Read more