The yield curve, or spread between the 2-year and 10-year yields, fell to 69.9 basis points on Tuesday, down from 77 basis points on Nov. 10. A flattening yield curve suggests the economy will weaken in the months ahead.
“My expectation is if you look at it one month from now, two months from now, the yield curve would have flattened,” Sri Kumar, president of the Santa Monica, Calif.-based Sri-Kumar Global Strategies, told FOX Business. “There are very few signs of inflation picking up. There are very few signs of the economy surging ahead.”
The U.S. economy has 10 million jobs less than it did in February and the unemployment rate remains elevated at 6.9%. Additionally, there is no sign of rising wages.
Other recent economic data has been tepid, at best.
Retail sales ticked up a seasonally adjusted 0.3% month-over-month in October, marking a sharp slowdown from the 1.6% pace of September. The disappointing data followed last week’s flat consumer price index reading and a discouraging consumer sentiment number, although economists at the University of Michigan pointed to the election as a factor in that reading.
Kumar expects further economic weakness in the months ahead as a resurgence of COVID-19 infections has caused many states to roll back their economic reopenings.
While many states have reverted to closing dining rooms and other restrictions, New Mexico is reentering a full lockdown. No matter the restrictions, they are a sign of an economy going in reverse.
A slowing economy and the increasing likelihood Congress won’t agree on another stimulus package until January are a recipe for lower bond yields, according to Kumar.
He sees the 10-year yield, which settled at 87.2 basis points on Tuesday, poised to retest its record low of 39.8 basis points before a vaccine becomes widely available around the middle of next year.
Pfizer CEO Albert Bourla said Tuesday that the drugmaker is “very close” to submitting its vaccine for emergency use authorization. The company announced additional positive trial news on Wednesday.
Combined with Moderna’s vaccine, the U.S. could have tens of millions of doses available by the end of the year. The vaccines aren’t expected to be widely distributed until mid-2021.
“As more people get vaccinated, more people gradually go back to work, go back to school, go back to doing what they did earlier,” according to Torsten Slok, chief economist at Apollo Global Management. “With that logic, we should probably also gradually see a normalization of the level of long rates gradually moving higher.”