The 10yr-2yr Yield Curve has had its first interruption of the new steepener
During this summer in which some of my indicators are at war with each other (as I step aside and let them duke it out, not trying to out-guess the process) let’s not forget to give the Yield Curve its due. I’ve marked up the chart of the S&P 500 and Yield Curve from Sentimentrader to again review what I think is an important question about how the first interruption of the steepener will resolve.
Per this January post we anticipated an interruption in the inflationary steepener:
For now, just understand that the curve steepening is inflationary. Also understand (using the run up to Armageddon ’08) that when it was time to liquidate the party, the curve rose again under a decidedly different condition.
And so here we are on August 17, with the first interruption of the steepening in play, much like 2008. The indicator is on the first leg of its grind (picture the macro in a blender).
When it resolves I’d put my money on the direction being up. I would not put my money (yet) on that steepening being inflationary, if for no other reason than everybody – with sloganeering Larry and Zero Hedge out front leading their herds – knows inflation is the play.
The curve can steepen under inflationary pressure (long-term yields rise more than short-term yields) or deflationary pressure (long-term yields decline less than short-term yields). The other alternative, which is less likely in my opinion, is Goldilocks. You might see her if the yield curve has aborted its steepener altogether.
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