Ear to the Ground

06 October 2023

A difficult market for assets this week, with particular pressure seen at the long end of yield curves, as they continued to steepen.  With the Bank of England and US Federal Reserve having left base rates on hold at their last meetings, shorter term yields have remained relatively anchored.  Despite inflation expectations also remaining relatively flat, we have seen yields at the long end of the yield curve rise.  The exact reason for this move is difficult to put a finger on.  Some believe it is because of the belief that interest rates will remain higher for longer, think of Table Top mountain.  Others are of the opinion that the moves have been driven by technical factors, such as supply/demand dynamics.  With the US government deficit expected to rise further this year, for example, issuance is expected to be on the up.

Adding flames to the fire on Friday were US non-farm payroll numbers.  Figures for September were higher than expected, increasing by 336,000 which was well above the market consensus forecast of 170,000.  Jobs were added above trend rate across a number of different sectors, including leisure & hospitality and government. 

Yields rising quicker at the longer end of the yield curve compared to the short end means the difference between the two is starting to narrow, i.e. the US Treasury yield curve is attempting to re-steepen/un-invert, whatever the correct phrase may be.  The differential between the 10 year and 2 year yield stood at -1.08% on the 3rd July.  At the time of writing that differential has narrowed to -0.31%.

In previous editions we have commented that the spread between these two yields is often sighted as a recession indicator.  It by no means causes one.  Likewise, it is not as the yield curve is inverting that a recession is, more as the yield curve starts to un-invert.  The stronger than expected non-farm payroll numbers have reignited the possibility of inflation fears and the potential that the Federal Reserve may have to do more when it comes to interest rates.  I guess the question is just how aggressive they are going to need to be.  Which then leads to the next question, will that aggression break something, and if so, what?  For now, however, strength in the US labour market continues to rumble on.

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