Much has been made recently of the flattening yield curve. But Mark Hulbert says the data indicates the flattening isn’t a major trouble sign.
“Given changes on the interest rate front over the last couple of weeks, the yield curve is now the flattest it’s been since 2009,” Hulbert writes for MarketWatch. “But a five-year perspective on the current yield curve tells us next to nothing. The economy was emerging from a recession in 2009, after all, not about to slip into one. And today’s yield curve is no where near as bad as it was in 2007, before the Great Recession.”
Hulbert says that a well known model introduced over a decade ago indicates the chance that the flattening yield curve is portending recession is quite low. Using February data, the model, developed by Arturo Estrella, a Rensselaer Polytechnic economics professor who formerly was senior vice president of the New York Federal Reserve Bank’s Research and Statistics Group, and Frederic Mishkin, a Columbia professor who previously served on the Federal Reserve’s Board of Governors from 2006 to 2008, indicated the probability of a recession in the next 12 months was just 1.33%. “Though we don’t yet know what the precise outcome of the model will be at the end of March, I can confidently predict that it will not be appreciably different,” Hulbert adds. He notes that “the same conclusion [about recession chances] would be reached if we focused on corporate yield curve, over which the Fed has little direct control.”
Strategist and columnist Doug Kass does tell Hulbert that the decline in the yield curve “portends disappointing net interest income (and [bank] margins) through the remainder of 2014.” Kass says to think about cutting back on bank stock holdings.