April 23, 2018 — A Flattening Yield Curve


Strategists are getting concerned about the flattening of the yield curve and the rate hike path laid out by the Fed.  The Treasury yield curve is the tightest it has been since 2007.  An inverted yield curve is a signal of a recession.  So does this mean the Fed is going to back off its advertised rate hikes in 2018?

St. Louis Fed President James Bullard has said he doesn’t support more interest rate increases unless there are upside surprises.  He is concerned over the flattening yield curve.  “If the committee pushes ahead here and longer rates do not cooperate, we could have an inverted yield curve within six months,” he said to CNN International.

On the other side, Dallas Fed President Robert Kaplan thinks the Fed is on the right track with two additional rate hikes.  “I think the path of rate increases is probably going to be flatter than people are accustomed to and one of the reasons is the moderating out-year growth,” he said during a Fox Business network interview.  He sees growth of 2.5–2.75 percent this year, but moderating to 1.75-2 percent in 2019 and 2020.

Interest rate swaps are the best hedging strategy available under the current conditions.