The destruction of term premium - If we break down the yield curve into its components of the short term rates and the term premium of the long end; I think we will find an interesting phenomenon happening in the long end.

Economists at the New York Fed developed a model that estimates the term premiums and publishes it daily. (Link: https://www.newyorkfed.org/research/data_indicators/term_premia.html).

From this data, we observe that the term premium has been negative for the last couple of years. Hence, we can back out the term premium to calculate the shape of the yield curve. Using the data, I created the chart below to highlight that in both 1999 (blue line) and 2007 (red line), the yield curve minus the estimated term premium was actually inverted. However, currently (green line), taking into consideration the negative term premium, the yield curve is not inverted. In fact, it is still upward sloping. The negative term premia of the last few years can be linked back to the extraordinary policy measures taken by central banks among other factors, and while I’m not proposing that this time it is different, I do believe that this time it is slightly more complicated.

Views from within the FED - If we look at the July 31st / Aug 1st 2018 Fed meeting minutes, on page 10 of the minutes the below paragraph is quoted as:

"Participants also discussed the possible implications of a flattening in the term structure of market interest rates. Several participants cited statistical evidence for the United States that inversions of the yield curve have often preceded recessions. They suggested that policy makers should pay close attention to the slope of the yield curve in assessing the economic and policy outlook. Other participants emphasized that inferring economic causality from statistical correlations was not appropriate. A number of global factors were seen as contributing to downward pressure on term premiums, including central bank asset purchase programs and the strong worldwide demand for safe assets. In such an environment, an inversion of the yield curve might not have the significance that the historical record would suggest; the signal to be taken from the yield curve needed to be considered in the context of other economic and financial indicators."

This suggests that there are members within the FED that appreciate the distortion of the yield curve that has resulted from the policies of the last 10 years.