Flattening Yield Curve Raises Warning Flag
Investors grow wary as difference between yields on two- and 10-year Treasurys reaches narrowest point since 2007
The gap between short- and long-term Treasury yields is at its narrowest in more than a decade, reflecting investors’ confidence that the Federal Reserve will maintain its current pace of interest-rate increases despite ongoing skepticism about the longer-term outlook for economic growth and inflation.
The difference between the two-year Treasury yield and the 10-year Treasury yield, known on Wall Street as the 2-10 spread, settled Tuesday at 0.428 percentage point, its tightest since 2007. Two-year yields tend to rise along with investor expectations for tighter Fed interest-rate policy, while longer-term yields are more responsive to sentiment about prospects for the economy.
.. John Williams, president of the Federal Reserve Bank of San Francisco said Tuesday in Madrid that while an inverted yield curve is a “very clear symbol that the economy’s about to go into a recession,” some flattening is typical when the Fed raises rates and he doesn’t anticipate an inversion of the yield curve.
.. Some investors are concerned the flattening curve suggests the Fed could raise interest rates more than the economy can handle.
.. On the other hand, higher short-term yields suggest investors have confidence that inflation will reach the Fed’s 2% target, but stable longer-term yields suggest a lack of concern that policy makers will lose control