Interest Rate Roundup

Thursday, March 22, 2007

Yield curve inversion ending amid rising inflation fears

I noted yesterday that the yield curve was starting to "dis-invert" due to the Fed taking a dovish take on policy. That's a fancy way of saying that 2-year Treasury Notes are no longer yielding MORE than 10-year Treasury Notes. They're yielding less, restoring the curve to a more positive slope.
Worse, it's a "bearish steepening" that we're seeing. That means ALL interest rates are going up, with long rates rising faster than short rates. A "bullish steepening" would be if all rates were going down, but short-term rates were falling faster than long-term rates.

I think the market is giving the Fed a big "thumbs down." Traders are clearly afraid the Fed will sacrifice its long-term inflation-fighting credibility in favor of "saving" the housing market in the shorter-term.

It's not just the steepening curve that leads me to say so. It's also the fact the 10-year TIPS spread is blowing out. You can read more here about exactly how the spread is calculated. Suffice it to say that it's a real-time indicator of heightened inflation worries, and the fact that it's rising shouldn't be ignored.
Lastly, don't overlook the fact oil, gold, copper and other commodities are climbing. That's the commodities market's way of saying: "Woo-hoo! This Fed is going to keep the easy money train chugging along!"


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