“This Is A Significant Market Development”: According To JPMorgan, Curve Inversion Has Arrived

Saturday, April 7, 2018
By Paul Martin

by Tyler Durden
Sat, 04/07/2018

When it comes to timing the next recession – or the next Fed policy mistake – there are few signals that pundits rely more on than the shape of the yield curve, which, as we have covered extensively in the past year, has bear flattened dramatically over the past year as the Fed has hiked rates, with the 2s10s now just 50bps away from inverting, at which point the countdown for both a recession and a bear market begins.

However, at a time of unprecedented central bank meddling and manipulation in all rates (and equity) markets, many strategists now believe that the longer-dated curve is no longer indicative of anything but noise, especially at a time when the long-end is directly being bought (or sold) by central banks (or Chinese reserve managers), thus perverting any “signal” it may have. In its place, a more accurate “signal” has emerged in the short-end of the curve, as manifested by the Overnight Index Swap, or OIS, futures market.

And it is here that something very notable has just happened: as JPMorgan observes, the forward curve for the 1-month US OIS rate, a proxy for the Fed policy rate, has inverted after the two-year forward point, to wit:

The US yield curve has started showing first signs of inversion. As shown in Figure 1 which depicts the forward curve for the 1-month OIS rate the US yield curve is currently slightly inverted after the two-year forward point.

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