Heading into this year, forecasters were nearly unanimous in saying that interest rates were headed higher.
With the year nearly over, though, the 10-year Treasury yield stands almost exactly where it was 12 months ago.
The bond market benchmark generally rises when investors are confident about the economic outlook, so the lack of movement is puzzling in a year that's had a soaring stock market, solid job growth and talk of tax cuts.
Of even more concern is the behavior of the yield curve, a term for the relationship between short- and long-term rates. In good times, the curve has a steep upward slope because investors want to be paid more for tying up their money.
The yield curve has flattened considerably in recent months. One closely watched measure, the spread between 10-year and two-year Treasurys, has fallen to just half a percentage point, its lowest in a decade.
This has set off alarm bells. A flatter curve typically means that the outlook for the economy is not so hot, and if the curve inverts _ with long-term rates below short-term ones _ it can be a harbinger of recession.
Even policymakers are concerned. James Bullard, president of the St. Louis Federal Reserve Bank, said recently that if the Federal Reserve keeps pushing short-term rates higher, "there is a material risk that the nominal yield curve will invert."
The Fed has raised short-term rates twice this year, by a quarter of a percentage point each time, and is widely expected to announce a third increase next week. Fed communications suggest a similar pace of increases next year.
Bullard, a nonvoting member of the Fed's policy committee, thinks the central bank has pushed "normalization" far enough for now. "The simplest way to avoid yield curve inversion in the near term is for policymakers to be cautious in raising the policy rate," he said in a speech in Little Rock, Ark.
Robert Kaplan, Bullard's counterpart at the Dallas Fed, also said his colleagues need to watch the yield curve. He said the Fed has "less operating flexibility" as the curve flattens.
Paul Christopher, head of global market strategy at Wells Fargo Investment Institute, thinks that might mean just one rate increase next year, not three. "We doubt the Fed would raise rates enough to damage the economy," Christopher said.
History provides plenty of reasons for concern, however. The Fed kept raising rates after the yield curve inverted in 1989, 2000 and 2006, and all three episodes were followed by recessions.
At other times, as in 1994, the yield curve flattened but the economy did fine. Scott Colbert, head of fixed-income investing at Commerce Trust Co., thinks the current episode could turn out to be relatively benign.
"It's a worry, but not as much of a bad signal as it usually has been, given ultralow interest rates overseas and the effects of quantitative easing," Colbert said.
Extremely low rates in Europe and Japan have sent investors flocking into U.S. Treasurys, putting downward pressure on bond yields for reasons that have little to do with the domestic economy. The $3.5 trillion the Fed pumped into the bond market between 2008 and 2014 depressed long-term yields by more than a percentage point, according to some estimates. The Fed is starting to reverse that policy, but only slowly.
So, if you see Wall Street forecasts calling for higher bond yields in 2018, be skeptical. This market is far from normal, and they've been wrong before.
