The US dollar is the world's reserve currency, but a growing de-dollarization trend may threaten its supremacy. Photo: Reuters/Gary Cameron

The flattening of the US yield curve during the past couple of sessions is noteworthy. The 10s-30s segment of the curve is especially interesting, because it has traded in two quite distinct regimes during the past 15 months. Between January and June 2017, 10- and 30-year yields showed a straight-line relationship, and again between December 2017 and March 2018 (albeit with a much narrower differential). Between June and December the relationship was unstable.

The June-December period included debate over and enactment of the Trump tax cuts. What the 10s-30s spread appears to be telling us is that the tax cuts will have more of short-term than a long-term impact on growth.

That explanation seems more plausible when we look at real yields and breakeven inflation separately. The shift from a flatter to a steeper regime is quite pronounced in TIPS:

It is much less pronounced in breakevens, which show a very distinct shift from one regime to another, albeit a much smaller one:

It would make sense that the market would expect the tax cuts to have an impact on real yields more than on breakevens, and expect that effect to be front-loaded.

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