Is the flattening yield curve a sign of trouble ahead?Contributors Karen Ward, Jai Malhi
The yield curve may have lost its predictive power if it no longer provides a signal about the stance of policy.
Historically, an inverted yield curve has been a useful indicator of recessions. However, quantitative easing may have distorted that signal. Therefore, we would not rely solely on the yield curve but also look at other indicators to track economic momentum.
The US yield curve is flattening. As shown in Exhibit 1 from our Guide to the Markets, the two-year Treasury yield is now broadly at the level of the 10-year yield. An inverted yield curve has been a useful indicator of recessions in the past, so this flattening is generating considerable concern among investors.
EXHIBIT 1: THE US YIELD CURVE
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