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Global Economic Intersection article of the week
With the debt ceiling extended, the risk of a catastrophic automatic pro cyclical Treasury response, as previously discussed, has been removed.
What's left is the muddling through with modest topline growth scenario we've had all year.
With a budget deficit humming along at 9% of GDP, much like a year ago when markets began to discount a double dip recession, I see little chance of a serious collapse in aggregate demand from current levels.
Factors Driving a Flattening Yield Curve
It still looks to me like Japan has a lingering soft spot and will continue an L shaped 'recovery.' The Fed is struggling to meet either of its mandates (full employment and targeted inflation) will keep this Fed 'low for long.' The term structure of rates is moving towards that dealing with that scenario.
With the end of QE, relative supply shifts back to the curve inside of 10 years, which should work to flatten the long end vs. the 7-10 year maturities. The reversal of positions related to hedging debt ceiling risks that drove accounts to sell or get short the long end will also drive a curve flattening process.
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