I have discussed how there is a sort of mental accounting problem with the yield curve model. The zero-slope is treated as a constant, when, in fact, meaningful inversion happens at low yields when the 10-year yield is as much as 1% higher than the fed funds rate, and at higher yields, the inversion has to become fairly steep to become meaningful.
During the past two months, the curve has become meaningfully inverted. Here, in the Eurodollar futures market, the upward bias of the longer-term yields is clear. What is important is that forward rates in the 2 to 3-year time frame are inverted. I suspect those 2021 Eurodollar contracts will close at rates much closer to zero.
Here is the plot of the fed funds rate against the 10-year Treasury, shown with the adjusted inversion levels. From this point, a normalized yield curve is highly unlikely to develop without lowering the fed funds rate. Expect the 10-year yield to be below 2% by the time that process is finished.
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