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  • The spread between the US 10-year treasury yield and 2-year treasury yield (10s2s) fell to 24 basis points today – the lowest level since August 2007.
  • The relentless flattening of the curve could be an indication the Fed is nearing neutral rate.

The US Treasury yield curve, as represented by 10s2s spread, hit fresh 11-year low (flattest) since August 2007.

The flattening yield curve is likely suggesting that the Fed’s interest rate is close to its neutral rate than its forecasts indicate.

Note that the Fed’s own range of estimates for the neutral rate was 2.3 percent to 3.5 percent in June. Further, the central bank intends to hike rates two more times this year.

So, the Fed could soon hit the neutral rate range and the market focus could shift from “faster rate hike narrative” to whether the central bank is feeling the need to contract the economy, i.e. push interest rates above the neutral rate.