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By HaleStewart December 24, 2017 7:43 am
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US Bond Market Year in Review: A Narrowing Curve, No Stress and No Inflation


            It’s been a very busy year in the bond market.  The treasury spread – which no one has discussed since the end of the recession – jumped back into the headlines as the 10-2 differential broke 100 basis points; other spreads came in to varying degrees.  Despite the many click-bait titles used to describe the event, the market is still fairly far away from giving a recession signal (whose efficacy is questionable due to the Fed’s QE program).  But it most certainly bears watching.  In other developments, the corporate market is still very liquid while the financial market stress indexes remain at very low levels.  Overall, the bond market is giving the economy a clean bill of health.

            The Treasury Market’s Compression

The top chart shows the yield curve at the beginning of the year and that of December 20th.  Thanks to the Fed raising short-term rates, the short-end of the curve has rallied: 1 month + 70  BP, 6 month +86 BP, 2 year +65BP, 5 year + 30BP, 10 year + 4 BP and the 30 year -16 BP.  Looking at the this from a pure spread perspective, we get the following charts:


The 30-year-FF spread (top chart) is compressed 114 basis points in the last year while the 10-year-FF spread (bottom chart) is 84 BP tighter.  Despite numerous predictions of doom based on the these charts, each is still modestly far away from giving a recession call.

            The Lack of Financial Stress

The Kansas City Federal Reserve calculates a financial market stress index every month; the St. Louis Fed does so every week.  Both use very similar source material, so they usually move in tandem:

Each is at very low levels, indicating there is ample liquidity in the credit markets.

            Corporate Spreads Are Still Contained

The top chart shows the AAA and BBB corporate yields; the bottom chart displays the CCC.  None show any sign of stress.  All the corporate markets – even the very speculative CCC sector – is very liquid.


            PCE Price Inflation Is Still Low

The Fed continues to argue that PCE price inflation will rise to 2% in the intermediate term.  Prices have yet to cooperate with the Fed’s predictions.  The top chart shows the 3, 6, and 12-month average of the overall PCE price index; the bottom chart shows the core rate averages.  Neither give any support to the argument that 2% is attainable in the intermediate term.         

n 2009, F. Hale Stewart, JD. LL.M. graduated magna cum laude from Thomas Jefferson School of Law’s LLM Program.  He is the author of three books: U.S. Captive Insurance LawCaptive Insurance in Plain English and The Lifetime Income Security Solution.  He also provides commentary to the Tax Analysts News Service, as well as economic analysis to TLRAnalytics and the Bonddad Blog.  He is also an investment adviser with Thompson Creek Wealth Advisors.   

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