Why the Yield Curve Is Flattening (And What That Means)

In bond markets across the world, yield curves are twisting and turning -- and flattening. The curve is a summary of the spreads between the yields on short-, medium- and long-term sovereign debt. In the second half of this year, from the U.S. to South Korea, gaps have been narrowing between long- and short-term rates as investors weigh the odds that the current surge of inflation will prompt central banks to move more quickly to dial back their massive pandemic-triggered monetary support of the economy than they had planned to. That outlook -- some central banks are already reversing course, including the Reserve Bank of New Zealand -- risks weighing down economic activity.

In the U.S., money-markets imply the Federal Reserve will lift its policy rate potentially more than once in 2022, after it’s likely to have wrapped up the tapering, or winding down, of its bond-buying stimulus program.