The general direction of the yield curve in a given interest-rate environment is typically measured by comparing the yields on two- and 10-year issues, but the difference between the federal funds rate and the 10-year note is often used as a measurement as well. But declarations that “this time is different” should be a warning that history might be about to repeat itself. There's been increasing speculation that the central bank will use yield-curve control (YCC) or interest rate caps for the first time since the 1940s to clampdown on rising Treasury security rates/yields and keep borrowing costs low for businesses and consumers. Bond prices move in the opposite direction of yields. We conduct world-class research to inform and inspire policymakers and the public. We don’t know. All of these factors increase the supply of Treasury bonds that the private markets must hold. I sure wouldn’t. The story took a breather when longer-term interest rates jumped during the first quarter. It was a half point, which was a significant drop. These include white papers, government data, original reporting, and interviews with industry experts. The truth is we don’t know for sure. A flattening “yield curve” is the latest sign of the tricky global cross-currents the Federal Reserve must navigate following years of ultraeasy policy. "If investors believe the Fed will stick to the peg, the Fed could achieve lower interest rates without significantly expanding its balance sheet. It is the extra returns investors often demand to hold a long-term bond versus a series of short-term bonds. Monetary policy refers to the actions undertaken by a nation's central bank to control money supply and achieve sustainable economic growth. The yield curve compares short government bond yields (anywhere from the Fed Funds rate to 2-year bonds) to long yields (10-year or 30-year bonds). You can learn more about the standards we follow in producing accurate, unbiased content in our. With YCC, the Fed would set a target rate for a bond with specific maturity and vow to buy as much as necessary to keep the rate there. The fact that the 10-year yield is, so far, staying around 3 percent suggests that monetary policy, with a federal funds rate of 1.75 percent to 2.0 percent, is near neutral today. The curve is said to be steep if short yields are much lower than long yields, flat if they are similar, and inverted if short yields are higher than long yields. The more the Fed signals its hawkishness, the greater are the chances for a flatter yield curve. It’s just a residual of the various factors embedded in market prices that we can’t explain. A flattening curve can spur worries about an economic slowdown. Percent change from previous month We strive to advance policy that promotes economic well-being. Maybe there is an excess of savings around the world. If the Fed continues raising rates, we risk not only inverting the yield curve, but also moving to a contractionary policy stance and putting the brakes on the economy, which the markets are indicating is at this point unnecessary. ", https://www.federalreserve.gov/newsevents/pressreleases/monetary20200610a.htm, Investopedia uses cookies to provide you with a great user experience. For example, at … If the markets were expecting higher inflation or stronger real economic growth, that should be showing up as higher long-term bond yields. The Fed also pledged to continue its numerous monetary policy procedures aimed at injecting financial liquidity into the banking industry, small and medium sized businesses, government securities and corporate bonds. So neither Fitch nor Yellen see the flattening yield curve as an ominous sign of anything other than exasperated NIRP refugees looking for a somewhat less gruesome alternative. 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