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Yield curve continues to flatten; 10-year yield drops below 2.9%

The spread between the 2- and 10-year Treasury yield narrowed further in August as the yield on the 10-year Treasury stood only 25 basis points above that of its 2-year counterpart. The high-level macroeconomic concern is that the current path will ultimately lead to an inverted curve, which has historically been a precursor to recession.

The current status of the yield curve has been driven more by increases in short-term rates than long-term rates. Since the start of the year, the 2-year Treasury yield has risen to about 2.6% from 1.9%, while the 10-year yield has moved higher by about 47 basis points. The latter is more directly connected to monetary policy as the Fed has appeared to have stuck to its plan to increase the discount rate throughout the year, while the former is more driven by supply and demand. Increased demand for U.S. Treasuries fueled by volatility surrounding changes in global trade and unrest in emerging markets has caused a flight to safety, depressing yields. Furthermore, there has been a notable shift by institutional investors in recent months to fixed-income strategies from equities.