The treasury yield curve is flattening. As measured in the nearby chart, the difference between ten- and two-year obligations has moved from 2.7 percentage points in July 2003 to 0.8 now. And it will narrow further, to the benefit of some investors and the detriment of many. The Federal Reserve's campaign has pushed its target short-term Fed funds rate from 1% last June to 2.5%, with more hikes on the way. Subtract inflation, using the Fed's favorite inflation measure, the consumption deflator excluding food and energy, and you get a real rate of interest of just 0.9%. Use the past 12 months' change in the Consumer Price Index for an inflation measure and you have a real rate of negative 0.5%. In other words lenders are paying borrowers to take the filthy lucre away. The Fed doesn't like that. So short-term rates are headed up.
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