Oct 4, 2019 - Economy

The Treasury yield curve has steepened for all the wrong reasons

Data: Federal Reserve Bank of St. Louis; Chart: Axios Visuals

The U.S. Treasury yield curve is steepening, which typically means investors are growing more confident about the economy. However, analysts say recent moves are actually the result of more fear being priced into the market.

Why it matters: Rather than bets U.S. growth or inflation will pick up, as is the case when the curve sees "bull steepening," action in the Treasury market reflects worry that things could get especially bad in the short term, Tom Essaye, president of Sevens Report Research, tells Axios.

  • "That's not a good thing."

Details: Investors saw fresh cracks in the U.S. economy from both the ISM manufacturing and non-manufacturing reports this week, as well as declines in private payroll growth from ADP and an increase in the number of Americans filing for unemployment benefits amid GM's auto workers strike.

  • The poor data also pulls forward expectations that the Fed will have to cut U.S. interest rates at its next meeting and again in December.

What they're saying: "Earlier this week it was a coin flip on whether or not the Fed was going to cut rates this month or in December, but the ISM and ISM non-mfg changed the odds quite significantly in a short amount of time," DRW Trading market strategist Lou Brien tells Axios in an email.

The big picture: While the Fed has qualified its 2 rate cuts this year as "midcycle adjustments," having to lower rates at its next 2 meetings "would be the Fed’s worst fears coming true," Brien says, signaling a much worse state of play for the U.S. economy.

Of note: The 3-month/10-year yield curve that economists call the best predictor of a recession remains inverted by a wide margin, and 1-month T-bill yields have ticked up to 24 basis points above those on the 10-year.

Go deeper