Yesterday's recap mentioned a 'farewell' to low short term rates despite longer term rates 'faring well.'  This is a reference to the major changes that have been taking place with the yield curve in July.  But just what the heck is the yield curve?

If you're familiar with the yield curve, thinking about it is fairly second nature, but it takes some time spent thinking about it before that happens.  If it's second nature for you, feel free to skip to the chart. 

If it's not second nature, don't worry, it's not that bad.  I find the easiest way to think of the yield curve is to forget the curve part.  Forget thinking about it as a line on a chart.  After all, if you do that, you'll be left with this same, boring, fairly meaningless chart that always pops up when you see a reference to a yield curve chart:

What exactly are we looking at here?  Simply put, those are the various yields (vertical axis) for Treasury securities of various time frames (horizontal axis).  Connect the dots with a line and you can call it the yield curve. 

But the actual yield curve is more of an esoteric concept that transcends easy chart-based explanation.  It's a dynamic, almost visceral idea with far-reaching implications.  Simply put, thinking about the differences in rates over given time frames tells us a lot of things about a lot of things.  

One of the things I began to hone in on last night was that the short end of the curve (the stuff on the left in the chart above) is increasingly being sold while the long end of the curve (everything from the 7yr on) is more stable.  This stands to reason with a Fed rate hike being however likely it is in 2015, but with a cloudier long term global economic outlook.

Bottom line, the yield curve is increasingly telling us that those long term prospects are shaky, and that the short term is most susceptible to Fed policy changes.  But how can we glean that concept from the boring chart above? 

We can't.  What we CAN do is break out pairs of yields and look at them compared to each other.  For instance, 10yr and 2yr yields are often compared.  To some, these are even synonymous with "the curve."  That's a mistake these days though.  Reason being: 2's have been so closely anchored to short term rates that looking at the difference between 2s and 10's is very much like looking at 10's themselves, but with different numbers on the y-axis.  You'll see how similar the two lines look in the top of the next chart.

When we move out to compare something like 5yr yields vs 30yr yields, now we have two contenders that are far enough away from the anchoring effect of the Fed's zero interest rate policy (ZIRP) that we can actually observe the dynamic movement.  This relationship is charted in the bottom of the next chart.

In both cases, we have 10yr yields overlaid to see how "rates" are reacting to changes in the curve.  Long story short, 5s vs 30s does even more to suggest that investors put their foot down in June in terms of rosy long term economic outlooks.  This is now the theme we watch, and for which we wait.  If it continues to play out, the 2nd half of 2015 will get increasingly interesting, either because the Fed will be forced to hold off, or because we'll be standing at the brink of a major shift in economic cycles.