The yield curve continues to flatten. Short term market interest rates are moving higher, while long term rates are little changed. This condition is a function of investors expecting the Fed to raise managed rates, while the data does not indicate any increase in inflation. There is no risk premium being demanded for higher inflation in long term interest rates. The spread between the yield on the two-year treasury and the ten-year has narrowed to just 71 basis points. This compares to the spread of 120 basis points at year-end 2016, and a more normal 200 basis points historically.

This spread could narrow further as the Fed moves rates higher in 2018 and inflation remains below the 2% target. Our forecast had called for inflation to move above the target due to rising labor costs in a tight labor market. We have experienced a tightening labor market, with the unemployment rate…

ProBank Austin Advisor – November 14, 2017