The bond market continues to scream that a slow growth, low inflation economic environment is on the horizon. To illuminate our observation we turn our light on the 2 year and 10 year futures market.
2 Year Treasury Note Future – Daily Chart
Over the last five days, 2 year Treasury Note futures have been trading lower in what could be classified as a minor correction. In the mean time, the 10 year Treasury Notes have caught a significant bid.
10 Year Treasury Note Futures – Daily Chart
The net result of this price action is a yield curve that is flattening. As measured by the 2yr-10yr spread the US Treasury yield curve has flattened almost 20 bps over the last month. To be sure, the curve is much steeper than a year ago and is still quite steep on a historical basis. However, a flattening curve is the first sign of impending economic sluggishness.
Bond investors are feeling more comfortable with the idea of US rates remaining low and inflation staying in check. In fact, they feel so comfortable that they are reaching for yield by purchasing the long end of the curve.
The message from the bond market is clear: expect a slow growth, low inflation environment. Perhaps the equity market reaction to Chicago PMI is the first sign that equity investors are starting to hear the message from the fixed income arena.
Disclosure: Long TLT and UUP
