Getting Back to Normal: The Yield Curve

The yield curve measures the difference between short-term, intermediate-term, and long-term Treasury yields. Typically, short-term yields are lower than long-term yields. Occasionally, this relationship is reversed though these instances are usually brief. The current yield curve inversion is the longest on record and seems to be nearing an end.

Higher short-term interest rates have been the catalyst for a large amount of assets flowing into short-term money market funds and Treasury bills.

Additionally, bond investors are currently in a difficult position as they attempt to play off the Fed’s shifting policies and mixed macroeconomic data. This presents the question of when will the yield curve normalize and what does the path back look like?

Using the popular 10-year Treasury yield compared to the 2-year yield, we can see the yield curve is getting closer to normal. Recently, the yield on the 2-year Treasury has fallen faster than the yield on the 10-year Treasury. However, with a historical average spread of roughly 0.86%, this measure of the yield curve still has much farther to go before being considered “normal.”

Recent Yield Curve Inversion