Weekly Economic Update-Flat or Curvy?

Lots of talk over the past few weeks about yield curves.  Lots of anxious talk.  What is a yield curve?  Why is its current shape scaring investors? Should it? We investigate.
The housing markets (and a lot of parents) heaved a sigh of relief as the young adults nicknamed Millennials finally started forming households, renting apartments, and buying houses. But new research finds that, whether with roommates or relatives, nearly a third of them still are sharing the remote.

The world is abuzz with the talk of yield curves.

Well, not exactly, but there has been a lot of discussion, even arguments, about why they are increasingly flat, and what that may portend for the economy.

The curve is the difference between the return on a long-term investment and a short one. Investors typically expect to get a higher yield from a long-term investment in return for higher risks like high inflation or rising interest rates.

MarketWatch editor William Watts explains it this way; “Typically, when an economy seems in good health, the rate on the longer-term bonds will be higher than short-term ones. Lately, though, long-term bond yields have been stubbornly slow to rise--which suggests traders are concerned about long-term growth--even as the economy shows plenty of vitality.” If the flattening continues they curve might “invert”, that is long-term rates fall below short-term ones.

At the last market close the difference between two-year and a 10-year Treasury notes was 30 basis points, the smallest difference in more than 10 years. While the rate for the 5/1 adjustable mortgage fell this week, it too has been steadily inching closer to the 30-year fixed. Only 68 basis points separated them last week, 15 basis points less than at the first of the year.

No question the curve is shrinking, but what does that mean, exactly?

Watts says the yield curve is perilously close to predicting a recession, while others say it is only when the curve inverts that we need to worry. The Federal Reserve Bank of Cleveland says inversions have preceded the past seven recessions while falsely predicting two others. They are mum on the issue of flattening. Meanwhile, Wall Street analyst Brian Belski says the stock market performs better when the curve is flat. He chides investors who he says are “flipping out, but history indicates that any histrionics are likely premature.”

Home Alone? Not Yet

Millennials have definitely, if belatedly, been forming households and buying houses, but the National Association of Home Builders says the percentage of those living with others is also increasing.

Their research shows that in 1990 only 4% of those the age of today’s Millennials, 25 to 34, were sharing living quarters with roommates or other non-relatives. That has now nearly doubled to 7.5% and the number living with parents has grown from 12% to 21%. Another 5% live with other relatives. These percentages surged in the recession but have continued to grow ever since. In total, more than 15 million Millennials, or one in three, is not really out on his or her own.



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