U.S. Yield Curve Steepest Since February on Tax-Cut Extension

[Elmore Furth]

Caveat emptor

December 18, 2010, 12:02 AM EST

Dec. 18 (Bloomberg) -- The extra yield Treasury investors demand to hold 10-year notes over 2-year securities touched the widest since February on speculation an extension of tax cuts will spur growth and increase deficits.

The benchmark 10-year yield rose this week to the highest level in seven months as retail sales advanced in November more than economists forecast and the Federal Reserve said the recovery is continuing. The U.S. economy grew at a faster pace in the third quarter, a report is forecast to show next week.

“The market will be subject to selling,” said Brian Edmonds, head of interest rates in New York at Cantor Fitzgerald LP, one of the 18 primary dealers that trade directly with the Fed. “It’s hard to think of anything good for bonds coming out of the tax-cut extension. Something has got to give.”

The difference in yield between 10- and 2-year notes increased for a third week, rising to 272 basis points yesterday, or 2.72 percentage points, from 268 basis points on Dec. 10, according to Bloomberg data. The spread touched 289 basis points on Dec. 15, the widest since Feb. 23.

Fed officials maintained following their Dec. 14 meeting a $600 billion program of U.S. debt buying under a second round of quantitative easing, saying the economic expansion hasn’t been strong enough to reduce joblessness. The recovery “is continuing, though at a rate that has been insufficient to bring down unemployment,” the Fed said in its statement.

U.S. Yield Curve Steepest Since February on Tax-Cut Extension

[rfranklin]

1. Maybe you can't call it a recovery then...

"jobless recovery." another example of complete inanity being accepted into the language.

[Statistical]

2. Nothing to worry about unless short end moves.

Pretend for a second the market is perfectly priced. What does a low yield on sub 2 year notes, rising 10 yr notes, and 30 yr notes mean?

It means investors are expecting low inflation for next two years but as the economies begins to expand we can expect to see higher inflation (thus investors are demanding more yield). This will stabalize after about ten years. The long bond is barely moving indicating market believes the US will reach a new equilibrium between growth, debt, and inflation on a long enough time horizon 15-20 years.