Seeking Alpha does a decent piece explaining what it means when the 10 year and 2 year treasury bond curve flattens:
The Fed has stated various times its intent to raise rates as the economy shows signs of reaching full health. However, protecting against inflation, which is one of the Federal Reserve’s mandates, does not seem to be their only concern. They have also spoken frequently about the normalization of monetary policy; that is to say to increase interest rates to levels that were common in the decades prior to the financial crisis in 2008.
Monetary normalization is probably why the Fed hiked interest rates in December, when true there had been stable job creation, but not as much as in 2014. There were a total of 2,744 jobs added in 2015 compared to 3,015 jobs for 2014. There had also been a spike in stock market volatility amidst concerns monetary tightening was being implemented too early and the economy would not be able to assimilate a more restrictive monetary policy. The latest data for the inflation rate at the time was at 0.5%, still far away from the Fed’s target inflation of 2%. Yet the move to increase interest rates was made and a tightening monetary policy cycle began.
But every time in the past when this happened we had a market correction and a recession. Don’t believe me? Bloomberg posted an article last week called ‘Bond Traders Should Prepare for Yield Curve to Zero Out in 2018‘ in which they finally said the dreaded ‘R’ word:
Just how much further can the relentless flattening of the U.S. yield curve go? All the way to zero, according to T. Rowe Price Group.
The timing matters because an inverted yield curve has proven a reliable indicator of an impending recession. When the spread between short- and long-term debt shrinks, it tends to hurt bank earnings and the real economy.
From all the market indicators I’m seeing, look for a full blown recession to hit between September 2018 and January 15th 2019.