Huge Moves in the Yield Curve This Year, What’s Going On? – MishTalk

December 5, 2023

The yield curve went from steeply inverted to nearly flat and is now becoming more steeply inverted.

Yield curve at various dates. Data from the New York Fed, chart by Mish.

Chart Synopsis

In May we had one of the most steeply inverted curves in history.
In a devastating selloff in treasuries between May and October, the yield curve steepened to a much flatter state.
The 5-year and 7-year treasury notes were most impacted, rising 1.46 percentage points and 1,48 percentage points respectively, in about 5 months.
The inversion increased through November and on December 1, the curve is about half-way between the May state in early May and early October.

Notice point two, with apologies to Game of Trades on Twitter. He commented the yield curve was steepening and I said it was flattening. The curve did steepen, but the result was a much flatter state.

The Shape of the Curve

Inverted Double Humped

I created that chart a few weeks ago, adding the last two shapes, steep (positively sloped) and inverted humped. The first four shapes are from Financial Edge.

I created the inverted humped shape (more accurately double humped) by turning the humped state upside down, then applying a perspective warp change in Photoshop. Turning the chart upside down alone will put the hump in the wrong place.

Financial Edge describes the humped shape: “A humped yield curve, also known as a bell-shaped yield curve, is a rare type of yield curve that occurs when interest rates on medium-term fixed income securities are higher than the rates of both long and short-term instruments.”

Investopedia says “Although a humped yield curve is often an indicator of slowing economic growth, it should not be confused with an inverted yield curve. An inverted yield curve occurs when short-term rates are higher than long-term rates or, to put it another way, when long-term rates fall below short-term rates. An inverted yield curve indicates that investors expect the economy to slow or decline in the future, and this slower growth may lead to lower inflation and lower interest rates for all maturities.”

There is no discussion of the inverted humped shape anywhere that I can find, but that is the current state.

Weird or Something Else?