About That Flattening Yield Curve

This is something people are starting to talk about. The long end of the curve is falling a lot faster than the benchmark 10-year Treasury Bond Yield. Should we care? What does this mean? And most importantly, how do we profit from it?

The first chart shows the 10-year yield range bound for 3 months, stuck between 2.6% and 2.8%. According to Bloomberg, this range over the last 3 months is the tightest in two decades. In only three other 12-week periods (one in March 2013, two in August 1998) has the 10-year yield range been less than 30bps:

But now look at the 30-year yields. They already broke that support earlier this month and holding below key levels:

Now look at the spread hitting levels not seen since 2010:

I've been bullish about the bond market all year long as we come off bearish sentiment extremes not seen since early 2011. If you recall, yields dropped from 3.7 to 1.7 in about 6 months last time there was this much pessimism in the bond market. I'm in the camp that the 30-year is leading us lower in rates and the resolution out of this 3-month consolidation in the 10-year will be to the downside.

Whenever we see these sort of sentiment unwinds, the trends that are born historically last longer than most people expect. I don't think we've seen much upside yet in bonds, although one can argue that a 9% return in $TLT year-to-date isn't bad considering the stock market is flat/down for 2014.

I think we have more to go. This flattening of the yield curve isn't good. An inverted yield curve, for example, has preceded every single recession we've had in the US. I'm not trying to be an economist or anything. Not interested. But it is appealing that this flattening process has begun. I can't say it's a good thing for stocks.

What do you guys think? How do we profit from this recent development? I mean, other than continuing to buy bonds. Any thoughts?

Tags: $TLT $ZB_F $ZN_F $TNX $TYX