The US bond markets are telling us something, but it is not clear exactly what.
Interest rates on two-year Treasury bills, known as the yield, have been climbing since late 2016. But the yield on the 10-year has increased far less. As a result, the difference between the two, known as the term spread, has compressed to less than 40 basis points. In trader parlance, that means “the yield curve has been flattening”, which has previously been a strong predictor of recessions. Is that the case today?
The rise in the two-year yield is probably being driven by growing conviction that the US Federal Reserve will continue to raise rates by about 25 basis points each quarter, till the end of 2019.
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