A steep yield curve indicates future growth or signs of future inflation. Right now, the yield curve is saying that the Fed is crazy. The current yield curve is at its steepest level ever and the continued easy monetary policy will only throw gasoline on the coming fire. The spread between 10 year and 5 year treasuries is 140bps:
How steep can the curve get?
The yield curve always tells a story. By being incredibly steep, it is suggesting that interest rates in the future have to be much higher than they are currently. The current 5 year treasury is earning 2% while the 10 year treasury is earning 3.4%. This means that the 5 year interest rate in 5 years must be much higher in order for us to achieve a 3.4% treasury rate. In the swap rate world, where you can actually make trades on the forward interest rates it implies that the 5 year swap rate in 5 years is going to be 5.03%.
Will the 5 year be higher or lower than 5%?
At what point do we suggest that there is enough easy money in the system? One thing is certain, the yield curve will eventually flatten out again. If you are brave enough to bet that the Fed will eventually step away from its free money policy, the ETN FLAT is a good way to easily place that bet.
