Everyone is now talking about the flattening yield curve in the U.S., and it appears that a consensus is emerging for a Fed-induced recession - or severe slowdown - in 2019. The rationale here is simple. If the Fed hikes three times a year and 5y-to-10y yields won't get traction, the curve will invert at some point in the latter part of 2018. This, in turn, has historically been one of the best pre-cursors for shift in the U.S. economic cycle.
It warms my heart to see that attention has turned to the 2s5s. Forget about the 2s10s and 2s30, the 2s5s is all we need. If markets truly believe that the Fed is about to steer the U.S. economy into a slowdown, 5-year yields won't go anywhere as the fed funds rate edge higher. If, on the other hand, markets think the economy will keep trucking despite higher rates - perhaps because the Fed gets behind the curve on tax cuts - they will move to sell 5-year notes, in size.
Alternatively, markets could take the position that the Fed is unlikely to push too far on the short end in light of still-record low policy rates in Europe and Japan. If that's your tipple, you are buying 2y notes, and selling the 5y. I have to assume that this month's Fed meeting will give markets some guidance on these questions.