All other things equal, the investors in a nation's sovereign-debt market demand higher returns the more long-term they commit their money. As yields rise with the length of the maturity, the curve that represents the yields slopes upward.
Under exceptional circumstances, the yield curve slopes downward. This can happen for a number of reasons, one being short-term turmoil in the debt market due to fiscal-policy uncertainty; another reason would be pure speculation.
However, there is a third reason, which is often overlooked in the debate over the yield curve: inflation expectations. Currently, the secondary market for U.S. debt looks as follows (including the last three days' worth of data):
Figure 1
Source: U.S. Treasury
While not perfectly inverted, the current yield curve expresses expectations by investors that inflation will subside over the longer term. The top of the yield curve is in the 6-to-12 month range, suggesting that investors expect inflation to return to more normal levels in 2024.
Many variables influence the yield on government debt, but inflation expectations are unique in their contribution to an inverted yield curve: from the viewpoint of those expectations, this yield curve is good news.
America saw a similar phenomenon toward the end stagflation period 40 years ago.
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We do not give investment advice.
This blog provides analytical information solely for the purposes of 1) predicting the cost of the federal debt, and 2) for assessing the risk for a U.S. fiscal crisis. All information published here, forecasting and other, is based on publicly available data from the U.S. Treasury, including but not limited to approximately 65 percent of the current debt; on macroeconomic data, including but not limited to monetary policy decisions by the Federal Reserve; and on macroeconomic theory.
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