The US Treasury bond market is affected by various factors (data chart)

Professionals who follow the US market have recently noticed the "flatten" of the Treasury yield curve. This is mainly about the narrowing of the spread between 2-year and 10-year yields, which is now 76 basis points (0.76%), the lowest level before the financial crisis.

Us 2Y-10Y Treasury yield spread (YTD) Source: us Treasury Department, Sina Finance

Some analysts are starting to worry, because usually such indicators mean a slowdown or recession, or trouble for the stock market.

"normally, you end up with a flatter yield curve, which leads to a recession," said Peter Boockvar, chief market analyst at Lindsey Group. "

DoubleLine CEO Jeff Gundlach said on Twitter that stock market bulls think low interest rates are positive, but interest rates are rising. The yield on the two-year note hit a nine-year high of 1.57 per cent on Wednesday, while the yield on the 10-year note was at 2.34 per cent.

If this trend continues, short-term bond yields may continue to rise, but not necessarily at the end of long-term bonds. Rob Kaplan, president of the Federal Reserve Bank of Dallas, said on the 18th: "the 10-year low interest rate may not be due to the loose financial environment, which may be a sign of concern about future economic growth." "

Whether this phenomenon continues or stops, it sends a warning signal to us. Yesterday, the Dow Jones Industrial average closed up at 23157.6 for the first time at 23000.

"it raises the question, how far can we go? "asked Jeff Carbone, a partner at Cornerstone Financial Partners.

Us 2Y Treasury yield (YTD) Source: us Treasury Department, Sina Finance

Since the beginning of the year, the yield on the two-year Treasury note (SHY), which implies the Fed's expectation of raising interest rates, has gradually risen from about 1.2 per cent to more than 1.5 per cent, while the yield on the 10-year note (TLT), which implies long-term inflation expectations, has fallen from 2.45 per cent to about 2.3 per cent.

10Y Treasury yield (YTD) Source: us Treasury Department, Sina Finance

The rise in short-term interest rates has gradually made it possible for some money market fund products to make a profit. Over the past few years, the inability of money market instruments to provide interest income due to an extremely low interest rate environment has forced fund companies that manage these cash assets to introduce fee reductions, which also affect their asset management income.

For those investors who hold US dollar cash and do not want to be too exposed to US dollar interest rate risk, by holding short-term US Treasury funds or short-term high-grade corporate bond funds, it can be used as a cash alternative in the scenario of flattening interest rates.

IShares 1-3 Year Treasury Bond ETF (SHY) is a highly liquid short-term Treasury fund that tracks the Treasury index for 1-3 years.

IShares 0-5 Year Investment Grade Corporate Bond ETF (SLQD) invests in investment grade corporate bonds with a maturity of less than 5 years.

Some niche products specifically capture the profit opportunity of flattening interest rates.

This is the goal of Barclays Bank iPath US Treasury Flattener ETN (FLAT). When the yield curve of 2Y/10Y treasury bonds flattens, the value of the fund will rise.

(clue Clues / Li Tao)