The Macro Report | January 2018

The yield curve puzzle


The outlook for U.S. and global growth remains solid in 2018. However, the relationship between the improving U.S. economy, the Fed funds rate, and the benchmark 10-year Treasury yield is somewhat of an enigma. The yield on the 10-year note continues to lag U.S. growth rates even as global monetary policies tighten and short-term rates rise. With benchmark yields perhaps poised to move higher, this month we explore several factors that help to determine them, including demand from foreign central banks, monetary policies across the G10 and in Japan especially, and demographics. The gap between nominal GDP growth rates and nominal yields is likely to be much wider than a “return to normal’’ would suggest in 2018.

Although markets have shown little concern over the yield disparity, we think some issues that could begin to influence markets include political tensions in Italy and higher oil prices. Italy will hold national elections in March, and the uncertainty threatens to undermine an already fragile economy. Additionally, oil prices have been spurred higher in part by protests in Iran, explosions in Libya, and Yemeni missiles over Saudi Arabia.


More from Macro Report

The outlook for U.S. and global growth remains solid in 2018. However, the relationship between the improving U.S. economy, the Fed funds rate, and the benchmark 10-year Treasury yield is somewhat of an enigma.