While most of the interest rate array is now increasing in a stable upward trend, short-term interest rates have been rising more rapidly than long-term rates, which is driving a declining yield curve spread. The monthly yield curve spread, as measured by the 10-year T-Note (10y TN) minus the 1-year T-Bill (1y TB), has been in a downward trend for some time, bottoming at 0.70 in December 2017, its lowest level since the beginning of 2007. During the first quarter, the spread jumped around a bit, moving up to 0.90 in February, before declining back down to 0.78 in March. Much has been made recently of the possibility for an inverted yield curve and historical correlations between inversion and recession, so the spread’s downward trend has worried many equity investors and economists alike. However, we don’t believe the current spread level tells us much on its own. Other factors are needed to provide context: the size of the spread decline from its high, additional interest rate trends, and CPI should also be considered. This dynamic has our attention, and in this context we do not believe interest rates are negatively impacting stocks or forecasting a recession in the near-term.
Regarding long-term corporate bonds, the quality spread has flattened. The quality spread has historically been a good predictor of confidence in the bond markets; a flat spread at its current level is still in good form for corporate bonds.
Information contained herein was obtained from recognized statistical services and other sources believed to be reliable and we therefore cannot make any representation as to its completeness or accuracy. Any statements not of a factual nature constitute opinions which are subject to change without notice.
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