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Viewpoint: Steepening U.S. Yield Curve Provokes Sell-Off

Federal Reserve interest rate increases have been underway for the better part of two years. But those increases have not been fully reflected in the longer end of the maturity curve- that is until the past few weeks. The yield curve has finally begun to steepen, that is short duration rates significantly lower than long term rates. Higher long- term rates begin to compete for capital with equities at some point. No one knows precisely at what rate that occurs, supporting evidence suggests 5%. One consequence of higher rates is that equity markets frequently weaken as they struggle to price in the new dynamic. Keep in mind that markets will move to price in any significant information, positive or negative, very quickly. This happens with earnings, interest rates, economic releases- the entire news cycle if you will. Consequently, markets will be well ahead of the end of any cycle. Given an inflation rate of 2 to 3%, and nominal GDP of approximately 5%, the end – point of this cycle is likely in the range of 3 1⁄2 to 4%.

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