The US has the steepest yield curve in the world according to Richard Bernstein (per Pragmatic Capitalist).
This has historically been a good thing for stocks. Why? A steep yield curve is when short-term interest rates are lower than long-term interest rates, which gives financial intermediaries incentive to lend, pumping funds into the economy.
On the flip side, you have the inverted yield curve. This is when short-term interest rates are higher than long-term interest rates, which discourages financial intermediaries to lend (why borrow at 5% to lend at 6%?) and is an indication that credit is drying up (cash is hoarded and not lent out).
This brings 3 caveats to mind:
- The yield curve is being distorted by the Fed.
- Banks still aren’t lending.
- As Bernstein notes, many emerging countries (India and Brazil) are close to having an inverted yield curve, which is usually indicative of an economic slowdown. If those emerging countries do slow that could have a negative impact here.
Still, on the margin I go with a positive, despite the above caveats. History has been a pretty good guide when it comes to the yield curve; however, it isn’t the clear cut “buy now” indicator it has been in the past.
