The yield premium for 10-year Treasury bonds over 2-year Treasuries has risen to a record high, and you can view that as a good thing or a bad thing.
The 282 basis point gap is good in that it indicates investors expect the economy to strengthen, but it’s bad in that it also shows investors anticipate higher inflation.
And many expect the yield curve to continue steepening.
The yield curve consists of the yields of Treasuries with all different maturities. Thus a steep yield curve occurs when the 10-year Treasury yield is much higher than the two-year yield.
“If you are going to have a recovery, you are going to have higher inflationary pressures, so the curve should continue to steepen from here,” Dan Greenhaus, chief economic strategist at Miller Tabak, told Bloomberg. “The curve could reach 300 to 325 basis points.”
Yield curve steepness last approached these levels in 1992 and 2003.
On both occasions, the economy was beginning to recover from recession.
But each time, the Federal Reserve waited at least a year to raise interest rates.
Tony Crescenzi, a bond fund manager at Pimco, says that if history is any guide, the yield gap will grow larger.
The prior peaks "didn't occur until the expansion was gaining some steam, and we don't know yet if that's the case," he told The Wall Street Journal.
Another technical indicator also points to inflation.
The yield premium of Treasury bonds over Treasury inflation-protected securities (TIPS) has reached a 16-month high.
TIPS investors think “inflation’s “inevitable somewhere down the road,” Todd White, who oversees government bond trading at RiverSource Investments, told Bloomberg.
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