The yield curve is the best indicator of where we are in the economic cycle. In the last year it has flattened. We explain what the market thinks future growth will look like based on the value of US Treasury yields.
Produced by Alessia Giustiniano. Graphics by Russell Birkett.
A positively sloped yield curve is often a harbinger of growth and inflation, as investors value longer term maturities more highly than shorter term ones.
If the shape of the yield curve goes the other way, or inverse, it is often seen as an indicator of a potential recession, as investors see such danger ahead and set a premium on nearer term maturities.
This chart measures the slope of the yield curve, as identified by the difference between the five-year and 10-year real US Treasury yield. During the worst of the latest crisis, the real yield curve was deeply inverted. Real tenure rates were about one and a half percentage points lower than real five-year rates.
By early 2010, the prospect of monetary and fiscal stimulus had pushed 10-year real rates about 1 percentage point above five-year real rates. This spread stayed around that level until the end of 2013. In the past year, it has collapsed to zero.
The US government's real long-term borrowing costs are lower now than they were at the beginning of 2016, and that is not what you would expect if traders were worried about the prospect of large future budget deficits.
However, optimism is limited with 10-year yields not as high as five-year yields. That is a sign that the market's belief in faster growth is not holding that far down the yield curve. It could be that the height of the hope for economic improvement has already been reached.