Something that has been quite remarkable in fixed income has been the recent move steeper in the US yield curve. This has been especially remarkable after it has followed so sharply after an inversion in the curve just two weeks ago. There are a lot of good reasons why this has been happening over the past week, and that all culminated with the softer core CPI print yesterday. However, the initial 2s10s inversion and the subsequent steepening may be telling us something about the state of the economy and this is what I want to focus on in this blog post.
Something I have been thinking about is the narrative about the strength of the economy, the yield curve and the odds of a recession as the Fed embarks on its fastest tightening cycle in over twenty five years. Innate to all of these topics is an obvious overlap, as the yield curve has been such a widely and almost reliable predictor of recessions in the past few economic cycles. The question is, what was the original inversion signaling and what should we make of the subsequent steepening?