Treasury prices are modestly higher (and curve flatter) ahead of President Trump’s trade discussion with Jean-Claude Juncker today. While no definitive resolutions are expected from the meeting, the European Union leader is expected to offer some trade concessions in an effort to dissuade the White House from moving forward with 25% tariffs on auto imports. European equity markets and U.S. futures are weaker this morning, with trade concerns and mixed earnings reports from yesterday weighing on sentiment.

A Bloomberg article released last night reports that some of the Fed regional bank presidents are urging Fed Chair Powell to avoid inverting the yield curve. According to one source in the article, Powell has “acknowledged but not embraced” those concerns to this point. As we have highlighted several times recently, curve flattening is the rule, not the exception, during Fed tightening cycles, but some leaders, such as the typically-dovish James Bullard (St. Louis Fed), are arguing that “tame inflation expectations” do not warrant further policy tightening at the risk of a curve inversion. An inverted yield curve has preceded each of the last five recessions going back to 1980, but the time between the initial inversion and the beginning of the subsequent recession has ranged from 10-22 months, with the longest lag the most recent episode in 2006-2007. The article also notes that long-end rates are currently “very low” by historical standards, which is a reference to the fact that term premiums for 10-year bonds are currently negative. This is most attributable to central bank asset purchases, and a reduction in central bank holdings could relieve some of the downward pressure on long-end yields by allowing term premiums to normalize.

Jason Haley
Managing Director, Investment Management Group