US Treasury Yield Curve Flattens To Lowest Level Since Financial Crash

The spread between two-year Treasury yields and ten-year Treasury yields narrowed 1.8 basis points to 48.9 bps, while the spread between the two-year and 30-year Treasury yields fell 1.6 bps to 74.5 bps, both at the lowest levels since October 2007.

The flattening of the yield curve, which is regarded as a predictor of recession, has largely been driven by new Federal Reserve chairman Jerome Powell's warning of "elevated" asset prices in some areas and the potential for a more aggressive tightening cycle over the next two years.

Powell (pictured), who has adopted a more hawkish stance than his predecessor Janet Yellen, hiked rates by 25 bps to 1.75% in his first FOMC meeting, with a further two hikes at least expected this year.

The FOMC said in a statement: "Near-term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely.

"In view of realised and expected labour market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 1‑1/2 to 1-3/4%.

"The stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2% inflation."

US stocks fall and 10-year Treasury yields widen following Powell's 'positive' outlook

Furthermore, the flattening yield curve has been heightened by an increased issuance of US government bonds this week as well as continued concerns about the potential for a full blown trade war between the US and China, according to the FT.

Analysts at Morgan Stanley said in a note last week: "We believe the overall message from the Fed supports a further flattening of the yield curve," according to the FT. "We suspect the chairman will push for four rate hikes this year. 

"We think the prospect of tighter monetary policy in the coming years will calm investor nerves about runaway growth and inflation.

"And, as a result, we expect investors to gravitate toward longer-duration bonds as the Fed continues to withdraw accommodation."