With stocks off all-time highs, there are a lot of bear market stories swirling around about how U.S. economic growth is faltering. One of these false narratives is about the classic economic cycle barometer, the yield curve (i.e. the US Treasury 10-year Yield minus the 2-year Yield).
According to a recent Wall Street Journal story, "A flattening of the Treasury yield curve in 2017 is a worrying sign for investors banking on resurgent U.S. inflation and growth."
Really?
The yield curve just registered its highest quarterly average in five quarters. So that's just wrong.
Why Does A Steepening Yield Curve Matter?
It's pretty simple. A flatter yield curve generally signals growth is slowing, as investors flee risky equities and seek shelter in safer bonds. A steeper yield curve portends accelerating U.S. economic growth, as investors sell safe bonds and buy stocks.
"Doesn’t it make sense that the curve has steepened, every quarter, since US growth bottomed in the second quarter of 2016," writes Hedgeye CEO Keith McCullough in today's Early Look.
(Note: U.S. GDP fell for five straight quarters too, from the first quarter of 2015 when GDP was +3.3% year-over-year to the second quarter of 2016 at +1.3% year-over-year.)
That’s right, the 10s/2s spread is at +110 basis points wide this morning and:
A) The Q2 of 2016 compare was a quarterly average of 98 basis points
B) The Q3 of 2016 compare was a quarterly average of 84 basis points
"If the third quarter of 2016 was the low for the 10s/2s spread quarterly average, of 84 basis points, what’s wrong with today's spread of +110-130 wide," McCullough writes.
Bottom Line
As we've been saying for some time now, U.S. economic growth is accelerating. Expect the yield curve to continue to steepen, despite the false narratives being passed around bears.
