The Treasury yield curve flattened today for reasons that are positive for investors. In particular, the flattening occurred because of reduced worries about the economy, which are resulting from the continued decline in commodity prices, especially the price of crude oil.
Improvements in the economic climate reduce the need for the Fed to keep the fed funds rate low and boost the odds of a rate hike. This pushes short-term interest rates up faster than long-term rates, which get the benefit of the improved inflation outlook resulting from the decline in the price of oil.
Hence, for equity investors, the flattening can be called a "bull flattening," as opposed to a "bear flattening" that results from worries about expectations for slower economic activity.
Today, the yield spread between 2- and 10-year notes narrowed 4 basis points to 140 basis points, which represents an 11-basis-point decline for the past week. The spread was as narrow as 117 basis points on June 12, but began widening when equities tumbled on the belief that the Fed would abandon any notion of a rate hike and perhaps lean toward a rate cut as a result of renewed pressures on the economy.
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Tony Crescenzi is the chief bond market strategist at Miller Tabak + Co., LLC, and advises many of the nation's top institutional investors on issues related to the bond market, the economy and other macro-related issues. At the request of the Federal Reserve, Crescenzi is a regular participant in the board's Livingston Survey of economic forecasters. He is also the author of the revised investment classic, The Money Market,
first published in 1978 by Marcia Stigum, and The Strategic Bond Investor. At the time of publication, Crescenzi or Miller Tabak had no positions in the securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Crescenzi also is the founder of Bondtalk.com, a popular Web site covering the bond market and the economy. Crescenzi appreciates your feedback; click here to send him an email.
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