The Fed met this week, and there were really no surprises. They left interest rates unchanged as expected, and the statement and press conference that accompanied their decision reiterated their intention to do whatever it takes to promote growth in the U.S. economy and to try to nudge inflation upwards towards their 2% target. The stock market paid little attention, preferring instead to concentrate on the potential short-term impact of coronavirus. Bonds, on the other hand, did react, and that reaction suggests a trade in the energy sector.
After the Fed’s announcement, an important part of the yield curve, the 3-Month 10-Year spread, once again inverted. Lest you have forgotten, inversion is when longer-term rates are lower than those at the short end of the curve. It is an unnatural state, as people usually demand a higher return for locking up their money for longer periods and is usually seen as a sign of trouble ahead.
There is, however, a school of thought that this time around, inversion isn’t a predictor of anything, just a product of where we are now. Interest rates around the globe have been extremely low for a while and central banks have been adding liquidity for a decade. That has enabled a recovery from the recession but one thing that would normally be expected as a result, inflation, has been noticeably absent.
The yield curve inversion could be simply a reaction to that. We have had a decade of growth with low inflation; who…