Long Term Perspective
The spread between long and short interest rates tends to widen near economic downturns and narrows during recovery/expansion. The spread narrowed in 1998 and 1999. In 2000, the yield curve inverted. That is, 10-year note yields were lower than 2-year note yields. Often this behavior signals an economic slowdown. The spread has fallen since 2003 but this time it appears to have been related to a rise in near-term credit demand and a rise in near-term inflation expectations while longer-term inflation expectations held steady. The markets actually led the rise in rates for the 2-year note as the Fed tightening that started in 2004 lagged the market until mid-2005.

Short Term Perspective
The spread between 2-year and 10-year note yields was negative (-14 basis points) in November, for the sixth straight month. The average yield on 10-year notes decreased 13 basis points to 4.60 percent and the 2-year note decreased 6 basis points to 4.74 percent. The yield curve is still significantly inverted (negative).