While the stock market continues to boom, interest rates on U.S. government debt are sending a mild signal of caution.  The yield curve has been flattening.

An inverted yield curve – where long-term rates are lower than short-term rates – is a signal of recession.  Investors are locking in longer-term rates, while borrowers are going after shorter-term loans.

On January 3, 2017, the 3-month rate on U.S. Treasuries was 0.53%. The 10-year yield was 2.45%.

On June 2, 2017 (5 months into the calendar year), the 3-month yield stood at 0.98%.  The 10-year yield was at 2.15%.

In other words, shorter-term rates have risen, while longer-term rates have fallen.  The change is not dramatic, but it is not insignificant either.  The yield curve is flattening.

We’ll see if this trend holds.  There have not been any really major movements during this time.  It has been mostly gradual.

One question is: Why are longer-term rates falling when the Fed is essentially promising hikes to its target federal funds rate?

Another question is: Why are longer-term rates falling when stocks have been booming and hitting all-time nominal highs?

There is a disconnect between long-term rates and stocks.  Stock investors are telling us to let the good times roll.  Meanwhile, bond investors are telling us to throw up the caution flag.  Which one is right?

I think stock investors have more influence in the short term.  We all know that bubbles can last far longer than it seems possible.

With that said, the bond investors tend to get the last laugh.  I tend to put my money on the bond investors over the stock investors in the longer run.