The Flattening Yield Curve

December 18, 2017

Over the last year, the 10-year US Treasury Rate has remained virtually unchanged. While it remains one of the most important rates to keep track of, it also does not tell the full story of what has happened in 2017. As we look at the different lengths of US debt, we can see that the yield curve has significantly flattened as short-term rates have risen and long-term rates have fallen. 


The yield curve is a graph that can be used to compare the difference in compensation an investor will receive between choosing longer- or shorter-term debt. Typically, the longer you're willing to lock up your money, the more compensation you should expect to receive. Thus, the typical yield curve slopes upwards.
 


As you can see in the chart above, when market commentators talk about a flattening yield curve, it is because the current rates represented by the blue line are more even (flatter) over time than the black line which shows rates from a year ago. 
Why does this matter? Rates are complex but longer rates usually reflect longer-term inflation expectations plus a little bit of extra growth compensation. If long-term rates stay low, it could be an indication that the market does not have high expectations for growth over the long term. 

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