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A flat yield curve is no mystery - Fed study

The gap between the short duration and long duration treasury yields continues to narrow.

The spread between the 10-yr yield and the 2-yr yield fell to a decade low of 60.5 basis points (bps) yesterday, while the spread between the 30-yr yield and the 5-yr yield fell to 70 basis points; again a decade low.

A similar yield curve flattening was seen between June 2004 and December 2005. 

Federal Reserve Bank of San Francisco researcher Michael Bauer says the leveling out is no mystery this time around. Low inflation and neutral interest rates, as well as political uncertainty, are all weighing on longer-dated bond yields, keeping them low, even as the Fed boosts the cost of borrowing in the near-term, Bauer writes.

Bloomberg report cites Bauer as saying, " if price pressures pick up quickly, investors could begin to demand better compensation for holding longer-dated securities -- reversing the flattening and potentially dinging stock market valuations, which are based partly on the low level of yields in the bond market."


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