The Treasury market’s message on the U.S. economy may be more noise than signal, but the Federal Reserve still needs to listen to it, The Wall Street Journal reported yesterday. With worries about global growth festering, and uncertainty about the coming referendum on the U.K.’s membership in the European Union further clouding the picture, the yield on the 10-year Treasury slipped to around 1.68 percent on Thursday. The last time it was so low was February, when markets around the world were in panic mode. Traders aren’t nearly as nerve-wracked now. But this latest drop in the 10-year yield has caused a flattening of the yield curve — the difference between short-term and long-term interest rates — that is disconcerting. With the two-year Treasury note yield at 0.76 percent, the difference between it and the 10-year yield has slipped to about 0.9 percentage points. That is the smallest gap since just before the recession started in 2007. Because investors typically demand to get paid more for locking up money for longer periods, the yield curve is usually positive. When the curve gets flatter, it is a sign investors don’t think future investment returns will be all that good, which usually means a slower economy. For the Fed, the flattening in the yield curve would historically suggest that it dial back any plans it has to raise rates.
