As of mid-July bond markets seem to have put their foot down with respect to the relationship between long and short term rates.  With the economic recovery and global growth outlook still open to debate--not to mention with global QE efforts ongoing--it makes sense for longer term rates to maintain a reasonable level of sponsorship.  This is in line with the cries we often here for the economy being unable to sustain much of a run higher in rates.

Such a run would seemingly be in contradiction to the Fed's stated intention of raising rates, but trading levels continue to show us how both can live in harmony.  Let's not forget that earlier this year, 2yr yields and 10yr yields were as close together as 120bps.  Today they're only 153bps apart after being closer to 180bps earlier this month.  For the sake of comparison, and to illustrate how much markets have already priced in a Fed rate hike, the spread was over 260bps at the end of 2013. 

In other words, short term rates have been rising relative to long term rates.  This trend had taken a break starting in February, but that "break" was more by way of response to the exceptional rally during 2014.  Rates have done more in the second half of July than any other time during 2015 to bring longer and shorter term maturities closer together.  It's a pure reflection of the very real possibility of Fed rate hikes combined with the still-shaky big-picture global growth outlook.

Traders saw today's stronger inflation-related components in the GDP data and found no new love for short term rates.  Reason being, that inflation data supports a Fed rate hike.  But the longer term downward revisions for GDP supported resilience in longer term rates.  As such 7-10yr yields (and production MBS) remained steady or improved after some morning volatility while 2yr yields are more than 2bps higher.