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Friday, March 1, 2024

This metric suggests there’s an economic boom ahead — and possibly inflation

  • One measure in the Treasury market is signaling a booming economy, fiscal spending and inflation on the horizon.
  • The closely-watched yield curve between 2-year and 10-year note yields are at the steepest they've been since May 2017.

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A person works out at Planet Fitness as they re-open at 25 percent capacity in Boston's Dorchester on Feb. 1, 2021.Jessica Rinaldi | Boston Globe | Getty Images

As Washington squabbles over stimulus, the bond market is already counting on lots of fiscal spending and an economic bounce back. In an extreme case, inflation might be a risk.

The metric the bond market is watching is the Treasury yield curve, or the difference between rates on various maturities, now at its steepest level since May 2017.

A steepening curve is typically viewed as a positive sign for the economy, the stock market and corporate earnings, while a flattening one is a warning for economic weakness.

The widely watched yield curve shows the difference between short- and long-term interest rates.

In this case, looking at the 2-year yield, now at 0.11% and the 10-year yield at 1.12%, the spread is 1.01 and edging higher with the rising 10-year yield. Rates move opposite price.

"It's being driven by the fact that policy, fiscal and monetary, is allowing there to be stronger economic growth for longer, without the Fed getting in the way, and that basically is allowing the economic cycle to extend further into the future," said Jim Caron, head of global macro strategies on the global fixed income team at Morgan Stanley Investment Management.

There are expectations of rising inflation, and this is being priced into the market, he said.

"It's really about having an economic boom, allowing policy to support that boom," said Caron. "That's the key driver of why the curve is steepening."

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