Morning Notes — QE Distortions in Nominal Curve

We’re in the camp that questions the recession signaling quality from yesterday’s 2/10 nominal yield curve inversion.  The move follows a narrowing of the entire nominal curve structure, while real yields curves remain very steep with a real 2/10 spread of +175bps.  Real yields are calculated by subtracting inflation expectations from nominal yields.  It’s quite unusual for the two structures to be so different.  But if nominal yields currently reflect QE distortions, the upward sloping real yield curve suggests it’s too early to call for a recession 12-18 months forward.  The difference could merely reflect a highly stimulative current Fed funds rate against an inflation forecast that signals growth ahead.