By David Randall
NEW YORK, Nov 1 (Reuters) – A surge in the yields of short-term U.S. government debt has investors focused on the shape of the Treasury yield curve, where the yield advantage that longer-dated securities usually hold over shorter-dated ones is on track to narrow at its fastest pace since 2011.
Money managers and economists often view a shrinking of the gap between yields on shorter-term Treasuries and those maturing out years – known as yield curve flattening – as a sign of worries over economic growth and uncertainty about monetary policy.
Here’s a quick primer explaining what a flat yield curve is and how it may reflect investor expectations.
WHAT IS THE U.S. TREASURY YIELD CURVE?
The U.S. Treasury finances federal government budget obligations by issuing various forms of debt. The $14.8 trillion Treasury market includes Treasury bills from one month out to one year, notes from two years to 10 years, as well as 20-and 30-year bonds.
The yield curve plots the yield of all Treasury securities and investors watch its shape to extrapolate market expectations for U.S. growth and monetary policy.
Typically, the curve slopes upwards because investors expect more compensation for taking on the risk that rising inflation will lower the expected return from owning longer-dated bonds. That means a 10-year note will often yield more than a 2-year note because it has a longer duration. Yields move inversely to prices.
From time to time the yield curve can invert, a…