Is The Fed Tilting The Yield Curve All By Itself?

Submitted by Pater Tenebrarum of Acting-Man blog,

The recent (bear) flattening of the US yield curve to levels not seen since before the GFC, a move which has only accelerated in recent weeks as the stock market hit all time highs, has prompted some to question the strength of the US economic cycle, and others to ask outright how long before the curve inverts, signaling an imminent recession. Here, as Citi's Jeremy Hale notes, just as "Dr.

Curve watchers Anonymous has an eye on the yield curve. Here is a snapshot of year-end-closing values from 1998-12-31 through 2015-12-31.Yield Curve Year End Closing Values 1998-2015

Tim Duy:

Thomson Reuters

Markets have been calm at the flattening of the yield curve — Is it the lull before the storm? Markets have been eagerly awaiting announcements from the Federal Reserve since the start of this year. The central bank maintained its neutral stance on interest rates for around nine years, without raising the rates. The authority has attempted to keep the markets calm and steady so far. But with interest rates so low and the economy showing signs of improvement — it might be the right time to introduce a liftoff.

Ever since the US manufacturing economy entered a recession over half a year ago as a result of the collapse in capex spending in the energy sector and the soaring layoffs in shale, the strawman used by the economic apologists to "justify" that the broader economy has not followed in such recessionary footsteps, has been the frequent trotting out of the yield curve, which simply because it is still curved upward in nominal terms (if flattening recently to levels not seen since 2007), is presented as "evidence" that the US is still growing.

The good news - thanks to the largest liquidity injection in almost six months, yields on China's sovereign bonds have fallen - the biggest drop since Dec. 29, to 3.50 percent, while the one-year dropped four basis points to 3.57 percent. .