There were two notes this morning from bond strategists wrestling with the difference between short- and long-term bond yields. With the Janet Yellen's talk of the Fed anchoring near-term yields through continued policy accommodation, and inflation still virtually non-existent, each wonders how 10-year yields can be so much higher than 2-year yields.
Economists refer to the difference between 2-year and 10-year rates as the yield curve. A steep curve, in other words a wide 2-10 spread, suggests the market expects higher inflation in the future. Clearly, investors expect inflation to accelerate significantly. By charting this relationship over time, we see the current spread of 240 basis points is approaching historical highs.
Hence the concern penned this morning by the bond strategists. As Peter Tchir writes (www.tfmarketadvisors.com):
We do have moderate growth at the moment, but we certainly don't have inflation. The PCE Deflator is 0.9 percent, well below the 25-year average of 2.2 percent and even below the Fed's more lenient target of 2 percent.
Add it all up, and Tchir argues for buying the ten-year bond. Given this morning's announcement by the OECD cutting its outlook for global growth by 0.4 percent to 3.6 percent this year, I tend to agree.