Steve Mnuchin agrees with his former employer when it comes to the yield curve.
The market has developed a veritable obsession with the flattening curve this year and that’s to be expected – inversion is approaching so it’s incumbent upon everyone to write notes and stories about the curve to feed market participants’ insatiable appetite for the topic du jour. After all, “recession warning” and such.
(Bloomberg)
Here’s a fun chart that illustrates monthly mentions of “yield curve” in news stories versus the 2s10s:
(Bloomberg, h/t Luke)
Earlier this month, Goldman released a lengthy note called “Yield curve inversion: a sheep in wolf’s clothing”. In it, the bank argues that investors need not necessarily panic about inversion. It’s a lengthy piece, but here’s the most poignant excerpt:
On the question of the yield curve being a signal, it’s worth asking which yield curve? Is it 2s10s, fed funds/10s, some short term forward curve that serves as the best signal? A historical analysis from the 1960s onwards shows that each of those curves identify every recession, but curve inversion isn’t a sufficient condition for a recession–in three of the last ten instances when these yield curves inverted, there was no recession over a subsequent two year window.
So basically, 3 out of 10 times, things were fine for the next two years. Just call that the Brian Fantana approach to curve inversions.
Jeff Gundlach isn’t particularly enamored with that approach. In an interview with Barron’s published last month, Jeff literally demanded that you respect the curve’s authority. “There’s a narrative out there that says the flattening yield curve isn’t sending any message about a recession, and that couldn’t be more wrong”, Jeff said.
The Fed continues to say they’re being vigilant. The obligatory curve discussion infallibly shows up in the minutes and they’re having the usual academic debates.
For whatever this is worth, Bullard suggested there’s no reason to test the curve’s track record when it comes to predicting economic downturns. “A lot of people have said we shouldn’t knowingly invert the yield curve and I agree with that,” he told CNBC in an interview from Jackson Hole last week. “I just don’t see much inflation pressure [and] the reason you would want to be preemptive is to shut down inflation”, he added.
Well, as noted here at the outset, Steve Mnuchin agrees with Goldman to the extent Goldman thinks you don’t need to be particularly concerned about imminent inversion.
“I, for one, am not at all concerned about the yield curve. I don’t think that’s a predictor of economic growth,” Mnuchin told CNBC on Tuesday, adding that if you ask him, “it’s a market condition, and for now having a flat yield curve with us issuing long-term debt is something we’re perfectly content with.”
That’s one way to look at it I guess. Here’s Steve, and do note how he goes out of his way to insist that Fed independence isn’t under fire despite Trump’s explicit condemnation of Jerome Powell and current U.S. monetary policy:
I guess what I would say with regard to Mnuchin’s comments about debt issuance is that they’re skewing that towards the front end, where rates are rising, so it isn’t entirely clear what he means when he says the flattening curve is helpful in the current environment.
It’s also worth noting that although Goldman recently cut their estimate for term premium recovery, you’ve got to think that eventually, the worsening fiscal outlook in the U.S. is going to lead to folks demanding more in the way of compensation.
But again, I guess Steve can always take comfort in the logic of his former employer who, as noted above, wants you to remember that “30% of the time”, a recession is avoided, “every time.”
