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Fed Hikes Seen Starting With Yield Curve Flattest in Generation

  • High inflation is pushing Fed to move faster toward tightening
  • Flattening curve is already ringing alarm bells for investors
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WATCH: Mohamed El-Erian discusses the U.S. November CPI report and what he expects to hear at the next Fed meeting.Source: Bloomberg

The Federal Reserve is laying the groundwork for the start of a cycle of interest-rate hikes that the bond market warns might be unusually constrained in how far it can go, setting the two on a collision course where one will eventually have to give.

The Treasuries yield curve -- or the spread between short-term and long-term interest rates -- looks set to be the flattest at the beginning of a Fed tightening cycle in a generation if the central bank begins raising its benchmark overnight rate in mid-2022 as now forecast. The two-year, 10-year spread is about 83 basis points, with futures indicating 55 basis points in June.