The flattening yield curve has sounded alarm bells in the bond market, raising fears of an increased possibility of recession in the near future. These fears are largely unfounded. When investors speak of a flattening yield curve they are referring to the tightening spread between short term and long term interest rates. Typically the spread between the 2 year treasury rate and the 10 year treasury rate (2s10s spread). A flattening yield curve may eventually become an inverted yield curve, implying the yield on short term rates will be greater than long term rates. This is a problem because it signifies the end of the short term debt cycle, a concept used by Bridgewater's Ray Dalio. The short term debt cycle involves the relationship between the growth rate of money and credit (or spending) versus the growth of the quantity of goods and services produced (capacity). Most spending is driven by increases in credit. For the private sector to generate credit growth, both borrowers and ...