The new year is starting with one certainty: the normalisation of the yield curve is underway.
The reason is simple: central banks’ focus turns from inflation to growth. That means that as inflation reverts to its mean, central banks will claim victory over inflation and will be more concerned about a deteriorating economy. That will call for interest rate cuts, precisely as the Federal Reserve’s December dot plot shows. Therefore, it is safe to expect font-end rates to adjust lower, resulting in a steeper curve.
The big question, however, is what will happen to the longer part of the yield curve as central banks cut rates. When answering this question, it is impossible not to enter into a heated debate regarding some sort of landing:
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A ‘soft landing’: Such a scenario implies that inflation reverts to its mean without a significant deceleration of the economy. In this case, the yield curve will bull steepen, but without a recession,…
