Wednesday was new Federal Reserve Chair Janet Yellen’s first meeting at the helm. Stocks sold off pretty hard after the announcement but rebounded yesterday. Neither action was very surprising; stocks are still quite over-extended and investors seem to have a quick trigger finger looking for any reason to sell and take profits. At the same time, the Fed’s announcement was a positive message for the economy, saying that they’re switching their forward guidance to a more well-rounded, qualitative assessment of economic health before raising rates.
I found the most interesting reaction to actually be in the bond market where the yield curve flattened quite a bit. The yield curve is the measure of interest rates (yields) of various bond maturities, ranging from 3 month Treasury bills out to 30-year Treasury bonds. Here’s a chart illustrating the current yield curve:
The useful aspect of the yield curve is to look at how “steep” or “flat” the slope is because it has historically been a very useful indicator of GDP and stock returns over the next year. A steeper curve indicates that short-term rates are probably too low because growth is accelerating. A flat curve says that short-term rates are probably too high and need to be lowered.
The curve has been relatively steep lately but interestingly began to flatten (2-year rates increased while 30-year rates decreased) after the announcement. I’m not surprised to see 2-year and 5-year rates rising, but I did expect the 30-year to move with them. The 30-year yield may have fallen for any number of reasons in the short-term (concerns about Russia for example), but this is definitely something I’ll be watching over the next few weeks. If the curve continues to flatten, it will not be a good sign for the economy in 2015. The good news is that things still look relatively strong for 2014.
Thanks for following and have a great weekend!
-Nick
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