One interesting observation here is that this flattening is very similar to the flattening that occurred during the last three Fed tightening cycles that preceded recessions, as chart 2 shows. Indeed, as the Fed tightened from '86-'89, the spread between the long end and the middle of the curve inverted. As the Fed tightened from '99-'00 the spread again inverted. As the Fed tightened from '04-'06 the spread barely inverted, but it did flatten substantially. To be fair, Fed tightening from '94-'95 was preceded by flattening in this spread, but a recession did not ensue. Today, while we do not have inversion of the middle and long parts of the yield curve the spread flattening has been large, especially when adjusting for the level of interest rates. It could be argued that with short rates pegged at zero, we may never get to complete inversion of the middle and long ends of the curve. In any case, rates in the middle of the curve rising while rates at the long end are falling is noteworthy and we'll continue to monitor it.
