Treasury yield curve flattens, pointing to recession or low inflation?

FXStreet (Mumbai) - The treasury yield curve in the US flattened, with long duration yields dropping more than short duration yields after the Fed took a surprisingly dovish turn on Thursday.

Recession or low inflation?

A flattening yield curve usually represents rising short-term rate hike expectations or a drop in the long term inflation expectations or a recession. However, the latest flattening of the curve could be more due to a drop in the long-term inflation expectations, since the Fed sounded worried about low inflationary pressures.

Meanwhile, Fed also stressed on the negative impact of the China and EM turmoil on the US economy. Consequently, the flattened yield curve may be indicating a slowdown at least if not recession.

At the time of writing, the 10-yr yield was down 5 basis points and the 30-yr yield was down almost 6 basis points. Meanwhile, the 2-yr yield was down 3 basis points. Moreover, the long duration yields are more sensitive to the overseas risk aversion/slowdown.