Flattening yield curve reflects confidence in Federal Reserve.(THE ECONOMY)(Brief Article)

Kiplinger Letter, The, June, 2005

The flattening yield curve doesn't signal a recession is coming, though that was the case prior to the past three recessions. The rate gap between long-term Treasury bonds and short-term T-bills is about a percentage point...the smallest since the 2001 economic slump.

The curve actually will get a bit flatter by early next year, when three-month T-bills reach 4.25% and the 10-year bond yields 4.75%.

The flat curve reflects confidence in the Federal Reserve, built over the past 15 years as the inflation rate has remained moderate. Investors believe the central bank will continue to hold down inflation.

High foreign demand for Treasury bonds is keeping long rates low. That's a recent development, but we don't expect it to stop anytime soon....

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