You’d think with all the geopolitical crises and a weak world economy that market fear and volatility would be high.

Instead, over the last month or so, we’ve seen a few fits and starts in the equity markets, but stock indices are still sitting close to all-time highs.

When the Fed raised rates last December, you would expect a yield curve that was getting steeper. That would signal an economy that’s getting stronger. The Fed would only raise rates if they thought the data supported it, right?

Wrong. The Fed raised rates because they were hell-bent on normalizing policy, not because the economy was getting stronger.

The Fed Chair, Janet Yellen, so much as said last month that the Fed isn’t really relying on economic data to make policy decisions. They’re reacting to risks from global economic developments.

Those global developments surely include what other central banks are doing.

That aside, the bond market shows that things may not be so great in the U.S. after all…

When there’s a steep yield curve, investors are speculating that strong economic conditions will spur inflation and that business is getting better. When investors buy longer-term bonds, they get paid a premium yield for the risk they’re holding. So when short-term rates go up, like when the Fed hikes the Fed funds rate, long-term rates usually go up even more in a normal market.

On the other hand, when the yield curve is getting flatter, it usually means that the economic outlook is bleak. Bank credit usually contracts and our economy just isn’t growing. A flat yield curve can even predict a recession.

Let’s take a look at the yield curve from after the Fed hiked in December to now:

In the last three months, rates across the yield spectrum are lower. But the spread between short and long-term yields is more narrow, which means the yield curve is flattening. If a steeper yield curve foretells a strengthening economy, and the curve is actually flattening – are bonds foretelling recession?