Yield Curve Spread at 18 bp

The yield curve flattened further this week.  The spread between the yield on the 10-year and 2-year Treasuries is a razor-thin 18 basis points.

Bloomberg quotes portfolio manager Jamie Jackson - "it doesn't make any sense".  The article does temper the bad news by saying that yields are nearing the 200-day moving average, which may prompt some selling.  Also, volume is usually tepid in August with many investors on vacation.

It does make sense.  A yield curve this shallow is a warning of slowing growth and/or an upcoming recession.  For (a lot) more on the subject see The Predictive Content of the Interest Rate Term Spread for Future Economic Growth (pdf link) by Michael Dotsey.

Watch for short-term rates to climb above long-term rates.  If this occurs and rates maintain that posture for a substantial period, consider it a warning sign.  The next Fed meeting (and likely 25 bp rate increase) is Sep. 20.

For more on the yield curve, see:  The Big Picture: Understanding the Inverted Yield Curve.