You can find any answer you want by comparing the current curve to various points in its history. Over the past 30 trading days, for instance, the curve is more or less unchanged. But comparisons over longer periods reveal a modest flattening.
A flatter curve may be a precursor to an inverted curve, which would cast a bearish shadow over the economic outlook. As economists are fond of pointing out, inverted yield curves (short rates above long rates) tend to precede recessions. In other words, the normal state of the curve (higher rates for longer maturities) is turned on its head when the state of macro turns dark.
The question is whether the yield-curve signal for estimating business-cycle risk has been rendered null and void thanks to manipulation of short rates in the extreme by the Federal Reserve via extraordinary monetary policy? That’s an ongoing debate, and threatens to remain so for some time. Meanwhile, let’s take the curve at face value and ask: Is it flattening?
One way to keep the spin to a minimum is to look at the current shape of the curve in context with history. For example, the chart below shows the current set of yields (red line) as of yesterday, Sep. 27, based on daily data from Treasury.gov. The historical range of daily curve data since 2011 is depicted in gray. The main takeaway: short rates are near the top of this range while long rates are approaching the bottom.
In sum, the curve is relatively flat compared with the last five years.
But that’s been true for some time. The question is whether it’s becoming even flatter compared with recent history? Let’s consider one example—90 trading days as the look-back window. By that standard, the curve has become a touch flatter, as shown above by the red line dipping below the blue line across the yield spectrum....MORE