A deflationary yield curve steepener is hinted at but not yet activated
How do we know that the recent spike is a would-be deflationary yield curve steepener? We know because the two elements that the 10yr-2yr yield curve is a product of are declining. Those would be the 10 year and 2 year Treasury bond yields. My bet is that the real steepener is not too far out on the horizon, but at the moment the 10yr-2yr yield curve is mashed up against its major daily downtrend marker, the SMA 200.
This is the mirror opposite of when the yield curve steepened in 2020 into 2021 as long-term yields (e.g. the 10yr) rose in response to the Fed’s inflationary policy. The 10yr and the yield curve eventually dragged the 2yr and the “transitory inflation” spewing Fed along with them.
Today the situation is much different and all you need to do is look at manufacturing to see input prices and output prices declining. Of course, the USS Good Ship Lollipop’s sails are still full of the hot air known as the vast consumer services industries, which are notorious laggards, cost-pushing inflation into the headlines.
Leading indicators are pointing toward a deflation scare of some kind. As yet, the yield curve is pointing (its middle finger straight up) but has not yet broken trend. Pretty sure it will, though.
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