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Happy New Old Year 2019… oh, wait…
As @lisaabramowicz1 notes: “The gap between 3-month T-bill and 10-year Treasury yields has collapsed in the past few weeks and is now at a new post-crisis low.” Or, put differently, the short run is the long run and vice versa. Which means that market expectations for longer term funding costs are now on par with markets assessment of the present, and the long term risk premium has been drawn to near zero. It also means that investors no longer view longer term returns as being attractive – a bond markets way of saying that any monetary policy normalization will have to be checked against the markets over-reliance on debt and leverage.
As a chart posted by @boes_ shows: the Fed has managed, so far, to completely flip upside down markets perceptions of forward risk pricing:
The white line above is the U.S. yield curve on the first day of Jay Powell’s tenure at the Fed, against the blue line today.
Whether these expectations are macro-driven (concerns about future growth) or risk-driven (concerns about the Fed’s capacity to normalize rates and money supply into the short- to medium-run based on liquidity/leverage/financial markets concerns) is an open question. It might be that the markets are now synchronized to price yeans the signs are pretty ugly for 2019 investment contribution to growth as well.