Whether the flattening U.S. yield curve should be a concern to traders is perhaps the biggest question in the bond market.
In the $5.1 trillion-a-day currency market, on the other hand, the trend is sending a clear signal: Sell the dollar.
After staging a two-month rally to rebound from its longest stretch of losses in a decade, the greenback is again in a slump. It's down 1.4% this month, even though two-year Treasury yields have increased in 15 of 20 trading days in November. Usually, climbing short-end rates bolster the dollar.
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The reason for the greenback's decline might just be the bond market's obsession with the flattening yield curve, according to Vassili Serebriakov, an FX strategist at Credit Agricole. Because an inverted curve has been a reliable indicator of recessions, it stands to reason that the phenomenon—and the attention it's getting across Wall Street—may be spooking traders out of long dollar positions.
"You could see the flattening of the curve as an indication that the market is losing confidence in longer-term U.S. economic prospects," Serebriakov said. Though the yield spread is likely shrinking for a variety of reasons, "it makes the market more wary of long USD positions."
The dollar has reliably followed the slope of the yield curve over the past year. The rebound in September and October bucked the trend, though the correlation reasserted itself this month.
Of course, the Senate's tax bill could throw into question the sustainability of both curve flattening and the dollar's decline, since easier fiscal policy may boost the outlook for economic growth. The chamber's Budget Committee on Tuesday voted 12-11 to send the Republicans' plan to the floor, meaning a full vote could take place as early as Thursday. It's a major step toward getting it enacted by the end of this year.
The Bloomberg Dollar Spot index touched a session high after the committee's vote, rising as much as 0.3%. The yield spread between two- and 10-year Treasuries increased from the day's lows. The greenback gained Wednesday while the curve steepened to about 60 basis points.
Yet the tax overhaul isn't necessarily a one-way bet for the yield curve or the dollar.
For example, it could be fueling demand for long-term Treasuries from corporate pension funds, who want to front-run the potential changes and take advantage of greater deductions.
That may mean more pain ahead for dollar bulls, said Jefferies strategist Brad Bechtel.
"There's an element of a one-off structural flow going through the rates market, and that seems to be driving dollar weakness," Bechtel said. 
From: Bloomberg News
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