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Yield Curve Sets Record Slope

dynamic-yield-curve

The chart above represents the Yield Curve at two points in time: the black line is the curve as it appeared on March 9, 2009, at the bottom of the stock market crash; and the red line represents the yield curve as it appears today. You can see that the slope of the yield curve is significantly steeper today than it was a year ago.

In fact, the slope between 2 year maturities and 10 year maturities is the steepest that it has ever been. That tells me that investors in the bond market, where interest rates are set for everything but Fed Funds, are planning on rates being significantly higher than they are now – most likely due to inflation.

If you are not familiar with the concept of a Yield Curve, it is really just a graph that plots current interest rates along a line from short-term rates to long-term rates. By examining the line, you can get a feel for bond investor expectations for economic activity and inflation. The steeper it is, the more inflation bond investors anticipate, and the higher yields they require to tie up their money in a fixed income investment for longer time periods.

Today’s PPI report on producer price inflation surprised on the upside, almost double what economists were expecting, seemingly supporting the views of bond investors.

This is a pretty critical thing; we’ll keep watching it and talking about it here. If inflation were to raise its ugly head while economic growth is predicted to be slow at best, it presents a situation where everybody hurts.

Your trivia for today has to do with the song in the video above. The album from which this song came had a rather unusual name that meant something to the band. Where did the name of the album come from?

Mark