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By HaleStewart December 17, 2014 8:50 am
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2014: The Year Of the Flattening US Yield Curve

     The chart above shows the US 30 year constantly maturing treasury (or CMT, left scale) and the 2 CMT (right scale).  Since the beginning of 2014, the 30 year yield has moved lower, dropping over 100 basis points.  In contrast, the 2 year CMT has risen about 30 basis points.

     As a result, the spread between the 30 and 2 year CMTs has decreased approximately 140 basis points, most of which can be attributed to the 30 year's rally.

     This has several important ramifications.

     1.) Inflation is not an issue: nothing scares treasury investors like inflation; even the whiff of potential inflation will increase market volatility.  The near year-long rally indicates no one -- and I mean no one -- thinks there is any inflationary pressure in the US economy.

     2.) There is a flight to safety in the market: US treasuries are considered safe haven investments, purchased when there is concern about world events.  Starting in the spring when the Ukraine situation really heated up, to constant stories about EU economic malaise, to the rise of ISIS in the ME and now to the oil market sell-off, the volume of "concerning" world events has certainly been high this year.  This has led to a safety purchase in the market.

     3.) The slight rise in the 2 year (about 30 basis points) indicates that traders are expecting a rate hike soon.

Hale Stewart is a former bond broker who has been writing about economics and financial markets since 2006 on the Bonddad Blog.  He is also a tax attorney with a domestic and international practice while also forming and managing captive insurance companies for US companies.   You can follow him on twitter at:@captivelawyer

 

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