Fed’s further yield curve flattening ignores banks’ problems

Over the years, we can claim to have “called” many economic developments correctly, such as the secular decline of the USD and the “L-shape” of the recession and associated weak recovery. We have, however, made one major error in that we expected the end of quantitative easing to lead to yield curve steepening. The logic seemed irrefutable: the US government would have to compete for its borrowing with the private sector, and accordingly, would have to pay higher longer-term rates.