Dazed and Confused

The yield curve is quite flat right now. This means that now two year government yields are
very close to rates on ten year instruments. This means that exercising optionality in ten year notes makes some sense and the two year/five year or two year/twn year swaps are quite cheap.

For home owners who have home financing using floating rates, this is not good news. A possible scenario could be the slowing of home sales, if not price reversals in hot markets like the two coasts and Chicago.

I'd argue that this malady is probably somwhat oil driven. When I think back to a few years ago,
I was able to buy regular unleaded gas in LaPorte, Indiana for only 89 cents per gallon. Last week I spent $2.73 for the same in San Clemente. And the price isn't much lower here in Chicago.
This bputs upward pressure on rates because it causes businesses to have to borrow more money o stay afloat. And it means ultimately that businesses need to increase prices to pay overhead.

But, if the Fed keeps focussing on inflation as a possible malady, we face the prospect of an INVERTED yeld curve. What does this mean ??

HIGHER SHORT TERM RATES THAN LONGER TERM (AN INVERTED TERM STRUCTURE) MEANS BANKS NO LONGER MAKE MONEY. Banks borrow from investors through checking and savings. But they "lend" money on the long end through mortgages and business loans.

Shades of Stagflation?? Think 1985 or "deja vu all over again".