...Since the Fed started buying, something odd has happened: the yield curve has flattened dramatically, reversing almost all of the August-November rise in the past month. The gap is still high, at 112bp, but bang in line with where it stood 18 months after the two previous recessions...
Yet, it is worth noting the tight link between the Fed funds target rate for overnight interest rates and the steepness of the yield curve. On this basis, perhaps the widening gap between 10-year and 30-year yields was simply down to talk of QE3, which improving economic data make less likely.
If past trends continue, the narrower gap suggests a rate rise in six months – when QE2 is due to end.
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