The continued collapse of the yield curve has been surprising, and unsurprisingly, it continues to garner much attention in the press and generate queries from clients. In last week’s Economics Weekly we discussed the fall within the context of the market’s view that inflation was likely to remain moribund; we argued that we are still likely to see inflation increasing from here on a cyclical basis and the recent behaviour of longer-term bond yields would suggest that investors don’t seem to be pricing in much of any increase in inflation at all from current levels. In this week’s Economics Weekly we place the collapse of the curve within the context of the current interest-rate tightening cycle. We examine the curve’s current behaviour relative to what happened during past cycles and why things might be different this time around.
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Richard de Chazal, CFA is a London-based macroeconomist covering the U.S. economy and financial markets.