What 1969 can teach us about today’s flat yield curve
The persistent flattening of the U.S. yield curve has investors scratching their heads-and searching for historical parallels. The recession of 1969-70 is one worth considering. A closer look at the late 1960s reveals some parallels with today's U.S. economic backdrop, as we write in our Fixed income strategy piece Summer of '69.
- Inflation was on the rise (albeit much more sharply than today) after a prolonged period of languishing well below 2%.
- The unemployment rate had steadily fallen to long-term lows below the 4% mark.
- The economy was receiving a hefty boost from fiscal stimulus (from President Lyndon Johnson's Great Society programs and Vietnam War spending)-at a time when the cycle was already looking long in the tooth. This parallels the tax cut and spending stimulus currently hitting the U.S. economy, which we see adding as much as one percentage point to growth this year.
In the mid-1960s, the Federal Reserve shifted from inflation-creating to inflation-fighting mode quickly, as shown in the Mad (money) men chart below. This contributed to a market downturn fueled by overheating -our lead fixed income theme for this year. Back then, late-cycle fiscal stimulus contributed to runaway inflation. The Fed aggressively raised rates, inverted the yield curve-and a recession followed.
Is a curve inversion-a frequent leading indicator of recession-ahead this time around?flatter curve Taking stock of U.S. rates . BlackRock Inflation GPS BlackRock's Q2 investment outlook. how
How does a cycle end?Fixed income strategy
The implicationdeflationary recessions
Bottom lineJeffrey Rosenberg , Managing Director, is BlackRock's Chief Investment Strategist for Fixed Income, and a regular contributor to The Blog