Yield Curve Sign of Weakening Economy? This Time, We Think Not.


The yield curve flattened 64 basis points (bps) in 2017 and 218 bps since the start of this economic cycle.1

Historically, a flattening yield curve has proven to be a sign of a weakening economy and an inverted curve a sign of recession (Figure 1). This is primarily since a flat yield curve has historically served as an indicator of monetary policy tightness and growth expectations.

Figure 1: The Yield Curve Flattens

U.S. Treasury Curve Steepness (1/1/85 – 12/7/17)

Sources: Thomson Reuters Datastream, New York Life Investments, as of 12/7/17. The yield curve is a curve showing several yields or interest rates across different contract lengths. In this case, it is represented by the 10-Year Treasury Constant Maturity Minus 2-Year Treasury Constant Maturity, regions shaded based on the National Bureau of Economic Research (NBER) recessions.

Today, monetary policy is loose, and financial conditions are quite supportive (Figure 2). So, it’s an unusual situation. Extremely low interest rates overseas hold down long-bond yields in the U.S., due to heavy international investor buying. Additionally, unusually low inflation levels for this stage of a cycle raise questions over the peak level of short-term interest rates.

Figure 2: Financial Conditions Remain Very Accommodative

Financial Conditions Index (1/1/85 – 12/1/17)

Sources: Thomson Reuters Datastream, New York Life Investments, as of 12/6/17. The Chicago Fed’s National Financial Conditions Index (NFCI) provides a comprehensive weekly update on U.S. financial conditions in money markets, debt, and equity markets and the traditional and “shadow” banking systems.

The yield curve behavior bears watching, but for now, we don’t see a reason for alarm, as low-bond yields have a stimulative effect on the economy, offsetting the impact of Fed hikes.

1. End date = 12/7/17. Start date = 12/30/16 and 2/22/10.

Opinions expressed are current opinions as of the date appearing in this material only. The information and opinions contained herein are for general information use only. MainStay Investments does not guarantee their accuracy or completeness, nor does MainStay Investments assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are subject to change without notice, and are not intended as an offer or solicitation with respect to the purchase or sales of any security or as personalized investment advice. There can be no guarantee that any projection, forecast, or opinion in these materials will be realized. Past performance is no guarantee of future results.

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This material is provided for educational purposes only and should not be construed as investment advice or an offer to sell or the solicitation of offers to buy any security. Opinions expressed herein are current opinions as of the date appearing in this material only.

Basis points (bps) refer to a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 1/100th of 1%, or 0.01% (0.0001), and is used to denote the percentage change in a financial instrument.

A yield curve is a curve on a graph in which the yield of fixed-interest securities is plotted against the length of time they have to run to maturity.

MainStay Investments® is a registered service mark and name under which New York Life Investment Management LLC does business. MainStay Investments, an indirect subsidiary of New York Life Insurance Company, New York, NY 10010, provides investment advisory products and services. IndexIQ® is an indirect wholly owned subsidiary of New York Life Investment Management Holdings LLC. ALPS Distributors, Inc. (ALPS) is the principal underwriter of the ETFs. NYLIFE Distributors LLC is a distributor of the ETFs and the principal underwriter of the IQ Hedge Multi-Strategy Plus Fund. NYLIFE Distributors LLC is located at 30 Hudson Street, Jersey City, NJ 07302. ALPS Distributors, Inc. is not affiliated with NYLIFE Distributors LLC. NYLIFE Distributors LLC is a Member FINRA/SIPC.


Poul Kristensen, CFA

Managing Director, Economist, and Portfolio Manager, New York Life Investment Management

Poul Kristensen, CFA is Managing Director, Economist and Portfolio Manager with New York Life Investment Management’s multi-asset strategic asset allocation & solutions (SAS) group

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