- The US yield curve has steepened to levels last seen in October 2018.
- The steepening of the curve is signaling optimism for 2020.
Wall Street’s favorite fortune teller – the Treasury yield curve or the spread between the 10 and two-year yields – is signaling optimism for 2020.
The spread rose to 0.328 on Monday, the highest level since October 2018, suggesting an improving growth outlook.
The yield curve was inverted for two weeks in August with the 10-year yield falling below the two-year yield. The inversion signaled that a recession could be imminent and drew investor attention after analysts pointed out that an inversion has occurred before every US recession of the past 50 years.
The growth scare, however, was short-lived, as the spread bottomed out in late August as Fed’s interest rate weighed over the yields at the short-end of the curve (two-year yield). The Fed delivered a 25 basis point rate cut in July, September, and October.
The recent steepening of the yield curve could be associated with trade optimism. Earlier this month, the US and China reached a deal to cut certain tariffs and delay planned new levies in a bid to de-escalate the trade war. The so-called phase one trade deal between the two countries could be signed as early as this week, the South China Morning Post reported on Monday.
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