The Economic Yield Curve Is the One to Watch

The rapid flattening of the U.S. Treasury yield curve is raising concern about the economy's prospects. That's to be expected, since the slope of the curve has gained in importance as a forecasting tool due to its consistent and reliable track record. In short, a narrow curve is associated with a slowdown in growth.

The economic signal is even stronger when there is an outright curve inversion, which is when short-term yields exceed those on longer-dated Treasuries. We're not there yet, but what has everyone up in arms is that at 63 basis points, the difference between two- and 10-year Treasury yields has collapsed from 128 basis points in January and is now the narrowest since 2007, just before the start of the last recession.

For some, changes in the Treasury yield curve are sufficient to warrant a change in the view on the future path of the economy. Right now, though, it’s not. It is important to balance the changes taking place in the financial market’s yield curve with the economy’s yield curve.