The 2s10s yield curve continues to grind incrementally lower, but negative carry is becoming a formidable headwind. One year carry on this part of the curve is a punitive 28bps. We are also seeing the forward yield curve struggling to flatten any more (top-left chart). Moreover, different parts of the spot curve are showing a reluctance to continue flattening, such as 5s30s (bottom panel of top-left chart). One year carry here is only ~5bps so the cost of having the position on is not an impediment to more flattening in 5s30s as it is with 2s10s. Also, we can look at the forward yield curve for insight. Recent work by the Fed suggested a forward yield curve (top-right chart) is better for gauging economic growth as it reduces the influence of the hard-to-pin-down term premium. We can see from the chart this curve has been steepening.

These behaviours in the forward curve and different parts of the spot curve show we are coming close to end of a nigh-on 5-year flattening phase. Certainly speculators are growing more supportive of the steepener position (bottom-left chart). Finally, a yield curve inversion is neither a necessary or sufficient reason for a recession (for that we rely on our Recession Signal), but as we can see from the bottom-right chart more flattening would be consistent with the late-cycle consumer euphoria we last saw just before the 2001 tech bust and economic downturn.

(Click on image to enlarge.)

Source: Bloomberg, Macrobond and Variant Perception