Home > Main > Bears create their own yield curve paradox

Bears create their own yield curve paradox

December 24, 2010

One of the problems the inflationistas face right now is the steep yield curve.  The most obvious action they can take to express their view is to sell the medium/long end of the curve.

But this trade just takes and makes the curve steeper.   The three-month is going nowhere, and the two year cannot go much higher without exposing itself to extremely odd 1 year-1 year out structures.

Here is a great chart from dShort that shows what has happened to the Yield curve since the announcement. 

dShorts discussion is a bit different than my post.  His article is excellent and you should read it.  I would add the fed has been clear that one of their aims is for lower long term rates.

This steeper yield curve should help to spur economic activity even more, but how much inflation will it create?    According to MMT, not much.

Real rates have gone up dramatically, while inflation expectations have not gone up much in this latest steepening.  Getting a high real rate of interest should draw foreign capital into this country – driving up the USD, and lots of that money will be parked in – Treasuries!

So with this trade, people selling long end create conditions that destroy their own trade.

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