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CIP Quips

Inflation Hesitation

What's in the News:

You may have noticed that the yield curve has been flattening over the past few weeks, with the spread between the two-year Treasury yield and the 10-year treasury yield narrowing to a mere 56 basis points.  Flattening of the curve often signals concerns about economic growth, and when the curve dips below or inverts it can signal a recession, as evidenced in the nine recessions since 1955.

So what could a flat or inverted yield curve mean for the Federal Reserve? 

Global Fixed Income Strategist for Société Générale, Kit Juckes said, “FOMC Minutes indicated that a December hike is almost certain, but longer-dated bond yields didn’t rise, hearing enough concern about possible asset-price corrections and the softness of inflation expectations, to flatten the curve”. 
As Merrill Lynch advises in its most recent Monthly Letter, “economic conditions have not yet heated up enough, in our view, to require tight monetary policy. Given the typical long lead time from a flat or inverted yield curve to a recession, this suggests that the probability of recession should remain low into 2019”.

Stubbornly low inflation has the Fed stuck between a rock and a hard place:

Interest Rates & US Breakeven Inflation Rates

11/30/16 - 12/11/17

Source: Bloomberg


What are we thinking?

As the year winds down and we prepare for the holidays, the last thing investors want to do is to have to watch inflation and yield curves, the Fed’s balance sheet reductions, price pressures, rate expectations, and issuer capital structures.  As active managers, we can help you position your clients along the yield curve. We believe it is just one block in building a risk conscious and conservative income portfolio.  



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