Thursday, December 14, 2017

The Long-End of the Curve Isn't Predicting Booming Growth

The chart above plots 10 years of the 10-year CMT (left scale) and the Y/Y percentage change in GPD (right scale).  Notice the following general trends:

1.) The 10-year has moved lower since the recession.  In the second quarter of 2009, the 10-year came close to 4%.  It is currently in the 2.3-2.4 range. 

2.) In absolute terms, the 10-year yield increased more than 100 basis points between the summer and fall of 2017, rising from 1.37% to 2.6%.  Traders called this the "Trump trade."  They believed that Trump would increase fiscal spending (largely on infrastructure) and lower taxes.  The combination would increase growth and inflation, hence the sell-off in the long-end of the bond market.  Since the election, yields have trended lower, incating the "Trump trade" is losing steam.

3.) The Y/Y percentage change in GDP has mostly printed between 2%-3% since 2010.  Weaker GDP growth is a function of slowing population growth, lower productivity, and the "debt-deflation" growth dynamic that characterized this expansion. 

4.) Yields are fluctuating between ~2% and ~2.6% -- hardly a level indicating booming growth.  This means bond traders are thinking, "more of the same is coming."