will the yield curve steepen in 2009?

the massive amount of bond issuance will most likely put pressure on the long end of the yield curve. this means we should see a further steepening of the yield curve in 2009, but it will not necessarily point to a big economic recovery like it has in the past.

typically, a steep yield curve encourages banks to lend and pick up the yield spread. this usually generates economic activity. as an example, in the early 1990s the spread between the two-year treasury note and ten-year treasury note moved up to 250 basis points and led to a recovery in the housing market. this may not happen this time 'round as the economy is deflating and the risks to new, unforced (nonrevolver) lending are high, making banks cautious.

this is most likely why, with the significant increase in money supply, there has not been a positive influence (yet) on the economy. the velocity of $ has shrunk as money has been parked in money-market accounts. this further extends the spread between the 2 and 10 year treasuries and should steepen the curve.

my prediction? given what i just wrote above, i think things basically play out as they did in the early 90s. banks will pick up the yield spread eventually.