Flattening from unusual places

23 December 2009 By Agnes Crane

The difference between yields on short and longterm U.S. government bonds is at a record high as investors bet on an inflationgenerating economic snapback. But what happens if that doesn t materialize? There are painful precedents.

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The yield curve – the difference between two and 10year Treasury yields tilted into record territory this month. Longerdated yields rise in anticipation of higher consumer prices while the shorterdated securities are anchored by the rockbottom interest rates set by the Federal Reserve. The yield curve hit its widest level ever on Dec. 22 at 2.87 percentage points.

The core personal consumption expenditures index, the Federal Reserve's preferred gauge of inflation that strips out volatile food and energy, rose 1.4 percent on a yearoveryear basis in November, unchanged from the previous month. In 2010, the Federal Reserve expects the index to hold between 1 percent and 1.5 percent.

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