Dec 7. Curve has flattened all year, will it change by Dec 31?

–Friday’s strong employment report sent the two year note yield to the highest level of the year at 64 bps, the highest since early 2011. While 2’s and 5’s both jumped about 10 bps, the 30 year bond was up only one bp to 296.5 and tens only 5 bps to 230.2. The curve flattened to new lows on the year. Red/gold eurodollar pack spread tumbled 11 bps to just under 158. The ten year note yield has been in a clear downward sloping channel all year, having started just above 3%, now defined by about 20 bps either side of Friday’s close, i.e. just under 250 to about 210.
–As we approach the end of 2014, it’s interesting to note that the highs of the year in the curve were set right at the end of 2013. For example, red/gold was around 305 bps and is now nearing half that (158). 2/10 was 263, now 166. 5/10 was 128, now only 62 bps. And 5/30 was 220 now just 128. Ten year tip to note spread began 2013 at 225, and is now around 50 bps lower at 176.5. The dollar index has rallied by 10% in 2014. Going into year end it’s difficult to see what can change the trend of curve flattening, especially given the disinflationary impact of oil prices and the strengthening dollar. The German schatz to UST 2-year is 66 bps, as twos in Germany trade slightly negative. The stronger dollar is also cutting the air supply to emerging markets.
–The Fed is likely to remove the “considerable period” language in next week’s FOMC meeting, another incremental step in a steady and slow path to remove accommodation, with the first actual rate hike expected in the middle of next year. It’s worth noting that August’15 Fed funds closed down 7 bps Friday, and are now 23 bps below January’15 (FFF is 9988.5 and FFQ 9965.5).
–A modest rise in Fed funds or IOER probably won’t have much of an impact on the US economy; the market is now pricing it in. Mortgage rates aren’t budging much, the 30 year mortgage rate is near the low for the year and about 50 bps lower than it started 2014. Perhaps the rise in the rate that discounts the future stream of earnings will negatively impact stocks, which may or may not cause an economic transmission via the (reverse) wealth effect. For now, catalysts for a big change in trend just don’t seem to be evident. However, at the end of 2013, many were forecasting new highs in ten year yields and a steady rise in Fed funds…sometimes the turn of the year turns the tide.