The Bull Flattening Continues: The Long End of the Yield Curve is The Flattest It’s Been Since 2009April 25, 2014
The long end of the yield curve has continued to flatten over the last several days. At 77 basis points, the spread between 30 year and 10 year treasury bonds is the narrowest it’s been since 2009 (1st chart below). The flattening, which began when Ben Bernanke first uttered the word, “taper” in May of 2013, has been driven primarily by a contraction of 30 year bond yields and is thus termed a “bull flattener”. In How Bullish is a Bull Flattener we explored the mostly deflationary implications of a bull flattening. In that post we also noted how stocks had basically disconnected from the yield curve since the middle of 2012 around when the Fed began its unlimited QE policy (2nd chart below). That disconnect has grown wider in recent days, but we don’t think the relationship between stocks and the yield curve has broken completely, it’s just become more tenuous. In the third chart below we attempt to show in a different way how stocks and the yield curve are connected to each other by measuring the six month changes in each and then putting a five month lead on the yield curve. We show a decently tight correlation between changes in the yield curve and changes in stock prices. We also note that the flattening of the yield curve over the last six months, at 32 basis points, is one of the most rapid flattenings we’ve seen over the last five years and at the very least suggests that stocks will have a tough time making a strong advance (a la 2013) in 2014.