The economy is on a positive trajectory and inflation dropped significantly. Gross Domestic Product (GDP) growth, on an annualized basis, was 1.6% in the first quarter, 3.0% in the second quarter and 2.8% in the third quarter.3 Inflation, which peaked at more than 9% in mid-2022, now stands at 2.6%.4
The Fed, as it considers its monetary policy, is trying to find a sweet spot, driving inflation lower without slowing the economy to the point that it causes a recession. So far, the Fed has achieved this so-called “soft landing.”
Higher government deficits, occurring in conjunction with elevated interest rates, require the U.S. Treasury to increase debt supply to fund federal government spending. Haworth says to this point, deficit concerns have not greatly contributed to rising Treasury yields.
The yield curve is (nearly) flat
For more than two years, an unusual environment persisted. The yield curve, reflecting yields across the Treasury security maturity spectrum, is typically upward sloping (see the line in the chart below representing the yield curve as of Dec. 31, 2021). In a normal environment, the shortest-term securities offer the lowest yields, and those with the longest maturities pay the highest yields. However, in 2022, the yield curve inverted as short-term rates rose dramatically, exceeding long-term yields (see the line on the chart showing the yield curve on June 30, 2023). In recent months, the market began shifting and today, the difference in yields between short-term and long-term bonds is marginal (see the line representing the yield curve on Nov. 25, 2024).1 “Today’s relatively flat yield curve (with very little variation in yields across the spectrum) reflects the transition period we’re in as the Fed alters its interest rate policy,” says Haworth. Ultimately, we should return to a normal sloping yield curve.