The Economic Future : The Yield Curve | The New York Times | March 18, 2015

Yield curve 101
The yield curve shows how much it costs the federal government to borrow money for a given amount of time, revealing the relationship between long- and short-term interest rates.

It is, inherently, a forecast for what the economy holds in the future — how much inflation there will be, for example, and how healthy growth will be over the years ahead — all embodied in the price of money today, tomorrow and many years from now.

Where we stand
The yield curve is fairly flat, which is a sign that investors expect mediocre growth in the years ahead.

In response to the last recession, the Federal Reserve has kept short-term rates very low — near zero — since 2008. (Lower interest rates stimulate the economy, by making it cheaper for people to borrow money, but also spark inflation.) Now, the Fed is getting ready to raise rates again, possibly as early as June.

Last time, a puzzle
The last time the Fed started raising rates was in 2004. From 2004 to 2006, short-term rates rose steadily. But long-term rates didn’t rise very much.
The Federal Reserve chairman called this phenomenon a “conundrum,” and it raised questions about the ability of the Fed to guide the economy.
Part of the reason long-term rates failed to rise was because of strong foreign demand.

Long-term rates are low now, too
Foreign buyers have helped keep long-term rates low recently, too — as have new rules encouraging banks to hold government debt and expectations that economic growth could be weak for a long time. The 10-year Treasury yield was as low as it has ever been in July 2012 and has risen only modestly since.
Some economists refer to the economic pessimism as “the new normal.”
Yields in Germany are negative.

As low as rates are in the United States, they are even lower in countries like Germany, where bond-buying by the European Central Bank has turned yields negative.

Investors who buy a German 7-year bond now, and hold onto it until 2022, are essentially agreeing to lose money. They will be paid back less money than they lent the government.

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