The Newly-Normal Treasury Curve: Good News or Bad News?

Are you relieved that the US yield curve is sloping upwards again? I am. For the first time in years, there's an obvious and safe place where people can invest their money: Treasury bonds. They felt ridiculously overpriced for years, bid up by foreign central banks and by a dearth of other places to invest, but the recent sell-off has finally made it possible to get comfortably over 5% on your money over pretty much any time horizon, completely risk-free.

Of course, there's a catch. James Stewart:

The problem is that the conventional wisdom about yield curves and the economy has been stood on its head in recent years, and no one has yet offered a convincing explanation why...
No less an authority than former Federal Reserve chairman Alan Greenspan called the recent inverted yield curve a "conundrum." That's because the Fed's campaign to raise short-term rates led to lower, rather than higher, long-term rates. Do we now have the makings of a new conundrum, higher long-term rates that remain so in the face of slower growth or even Fed cuts? (...)
I don't think investors should underestimate the significance of a sustained rise in long-term rates to an economy that has become gorged on easy credit.

In other words, if times were good when the curve was inverted – and, yes, times were very good indeed – then it's entirely consistent to think that times might be bad now that the yield curve looks "normal" again.

And there's one thing which remains abnormal about the current situation. While risk-free rates have spiked up substantially, credit spreads have barely budged. The whole market, it seems, is waiting for the other shoe to drop, and for spread markets to widen out in line with the new higher-interest-rate environment. But it hasn't happened yet.

That's either cause for relief, or cause for worry. I tend towards the latter: if the yield curve is starting to look normal, the spread curve is likely to move back to a more normal shape too, sooner or later. I'd be much happier in Treasuries right now than in credit.