US Bond Yield Curve Flattens as Inflation Concerns Rise

The US bond yield curve has flattened as investors become increasingly concerned about inflation and borrowing costs. The spread between two-year and 30-year US bonds narrowed to 71 basis points, its lowest level since late June, indicating that investors are preparing for a possible economic slowdown. This is not just due to the upcoming rate-hike cycle aimed at containing inflation, but also because of growing doubts about the economy's ability to withstand higher borrowing costs.

The recent market moves have been significant, with the gap between two- and 10-year bonds narrowing to its lowest level since July 29. This suggests that traders believe high inflation readings and doubts about Fed Chair Kevin Warsh's credibility could force the central bank to begin a tightening cycle as early as this week.

Meanwhile, important price levels have been reached in other markets, putting pressure on US consumers. Oil prices rose above $100 a barrel, while the average price of diesel exceeded $6 per gallon for the first time. The approach of 10-year Treasury yields to 5% has also pushed mortgage rates to their highest level since May last year.

These factors could have a significant impact on consumer spending, which accounts for about 70% of all US economic activity. A sharp rise in energy prices will reduce the money consumers have available for discretionary purchases, while a weakening housing market could have an even more serious effect.