Yield curve movements are usually divided three types of latent factors: level, slope, and curvature. The first is the overall parallel movement in yields. The second is the slope associated with steepening and flattening. The third is curvature or the amount of bowing or butterfly twists in the curve.
Generally, approximately 85+% of the yield curve changes over the long run have been through adjustments in level. Slope is the next most important and can represent 5-10%. The remainder is associated with curvature. This month, curvature is having a strong impact on yields. This is not normal behavior.
This curvature expectations are that the Fed will increase rates rapidly, but it will have to stop the increase and reverse some of its actions beyond 2025. Inflation will either be controlled after three years or there will be a recession that will force rates lower. Nevertheless, these are current expectations and just as fast as the increase, the bond market can price a reversal if there is a recession from our current commodity shock.
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