Trade War Talk and Data Combined With Aggressive Fed and Dovish ECB = Flattening Yield Curve

This week’s continuing and escalating rhetoric about tariffs and potential trade wars has roiled markets.  Also a drop in durable goods orders indicated that the talk has started to affect the economy as businesses are slowing up on ordering things like planes, cars, electrical equipment, etc.  The ECB’s recent announcement that they are very gradually tapering bond purchases is keeping German bond rates very low (with the 10 year at about 0.30%).  US Treasury yields benefit from the “relative value trade” when those bonds are at such low yields.  All of these factors are depressing US Treasury long bond rates, our 10 year is at 2.82% (remember that 40 days ago it was at 3.12% and projected to hit 3.50% by year end).  The depressed long bond combined with the hawkish Fed contributing to higher short term rates has resulted in the flattest yield curve since 2007.  Is this a harbinger of a recession?  Or a confluence of unique metrics that is part of the “new normal-uncharted territory” theme of post crisis world economies. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners