Perverted Yield Curve

We can now add the inverted yield curve to the lexicon of the average Joe along with the TED spread,  The CDO Market and The VIX. Generally, these inside baseball terms only become suitable for mass consumption when something is amiss, or perceived to be amiss. As we have pointed out repeatedly, things have been non-normal in the global rates markets for many months now, and as of late the gravity of this disconnect between  fixed income and the real economy has begun to hit home. It is our contention that the  shape of the yield curve is an indicator, a global conglomeration of the forecasts and perceptions of what market participants feel will happen at that moment in time across a wide span of time horizons. The Federal Reserve, through a variety of measures can essentially control the front end of the curve, through its manipulation of the fed funds and discount rates, the rest of the curve is dictated by the market and as such is not necessarily under the direct purview of the Central Bank. It drives us crazy to hear some talk about the need for the Fed to “catch up” with the market, and it makes us even more insane to hear some argue that the Fed needs to forcefully steepen the curve to stave off a recession. Forcing a curve steepening is akin to focusing on the hair loss for a patient undergoing chemotherapy, the hair loss is simply the result of the treatment for the underlying illness and should not be the focal point of care. If one can take away anything from the inversion in the yield curve it is that an inversion in the yield curve at negative real yields indicates only that the linkage between rates and real economic activity has been severed. A steepening of the curve at these levels will accomplish absolutely nothing, particularly if it leads us deeper into negative rate territory. 

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