Yield Curve Flattening

A good man pays his debt
But you ain't paid yours yet
--Heart

The yield curve is a plot of yields at various Treasury bond durations. When times are good, people generally like to see a 'steep' yield curve, meaning that there is a significant positive difference between short and long rates. This permits an attractive 'carry trade' where investors can borrow short duration and buy long duration.

In tough times, the yield curve 'flattens,' meaning that there is less difference between short and long rates. In an economy that depends on borrowing and leverage as ours does, this is an unwelcome event.

Presently, the yield curve is flattening. Much of this has been Fed induced as QE buys in long bonds, forcing their yields lower. Difference between 5 and 30 year Treasury yields is back to early 2009 levels and only 50 bips from 2008 lows.

Harbinger of coming problems? Not sure, but is seems likely that carry trades will come under increased stress.