Some Thoughts On The Yield Curve and Rates Ahead

2/7/21 by Chuck Cronin

The stock market closed out last week on another winning week, the major averages posting their best showing since November.

For Real Estate borrowers and investors however, a fundamentally more important development occurred last week, the yield curve—(the graph of Treasuries from short- to long-term maturities 2-10 year )—continued to steepen and is now the most sharply upwardly sloped curve in years.

That is a result of longer-term yields climbing, with the benchmark 10-year note ending the week at 1.17%, near the high end of its recent trading range, and the 30-year bond at 1.98%, nearing 2% for the first time in about a year. This is a classic indication that the bond market is anticipating stronger economic growth and higher inflation. Those expectations got a boost Friday after both houses of Congress voted to begin the process of approving the $1.9 trillion fiscal relief plan. 

The attached article and graph shows the 2019 yield curve 2-to-10-year treasury spread was 14 basis points In 2020 the yield curve inverted, the two-year was higher than the 10 year, an inverted yield curve preceded the last seven recessions. As it had in 2020, while it did not predict pandemic it suggested a correction and recession would have occurred anyways.

We are now faced with the yield curve steepening, historically a steepening curve typically indicates stronger economic activity and rising inflation expectations, and thus, potentially higher long   term interest rates. The 2-10 differential is now 102 basis points.

Should I lock? Wait? Please see the attached for guidance but do get prepared and contact us for more information.