Today, the slope of the 2s-30s Treasury Curve has spiked to 82 basis points (Figure 1) – this is significant because the sudden steepening of the curve the past few days breaks a multi-year downtrend that began in 2012 towards a flatter curve (Figure 2). The evidence is gathering that the period of a flatter curve has ended, and a period characterized by a steeper curve 2s-30s has begun. This has significance for investors because:
- A steeper curve is associated with positive expectations for growth
- A steeper curve is also associated with rising expectations for inflation
A steeper 2s-30s curve captures the full breadth of investor expectations and longer duration investors are especially sensitive to changes in growth and inflation expectations.
We believe this important signal from the 2s-30s curve means investors should:
- Stay overweight risk: This environment is positive for stocks and corporate credit (investment grade and high yield).
- Underweight US Treasuries: While Treasuries are the ultimate safe-haven investment, the new Powell Doctrine means the Fed will seek to insulate the US economy from trade wars. While this may support the shorter end of the yield curve, longer Treasuries are increasingly vulnerable. Furthermore, as stocks likely regain their footing, the safe-haven capital that moved into Treasuries in recent days is likely to reverse itself.
- Underweight the US Dollar: Expectations for Fed easing, which are contributing to the steeper curve environment, have capped the dollar rally. A falling dollar supports inflation expectations, growth-oriented currencies, and is very positive for emerging markets. This environment is also negative for risk-off FX like the Japanese yen.
This environment, as noted in prior commentaries, is reminiscent of the late 1990’s.
Figure 1: 2/30 Treasury Slope
Source: Bloomberg, accessed 6/5/2019
Figure 2: 2/30 Treasury Slope (Historical)
Source: Bloomberg, accessed 6/4/2019
Jonathan E. Lewis
Chief Investment Officer
