During the past 9 months, the Fed has raised rates by a quarter-point six times, from 1.25% to 2.50%. During that time, the ten-year US Treasury bond closed started at 4.62%. and has dropped to 4.16%.
So while the Fed Funds Rate has doubled, the long end of the bond market has actually declined. The effect is often referred to as a "flattening yield curve," in reference to the chart line of rising short-term interest rates approaching the chart line of rising long-term interest rates.Eric quotes David Gilmore, a partner in research firm Foreign Exchange Analytics, as saying: "It is scary when one realizes that the U.S. yield curve is not really representative of inflation expectations in full, but reflects the visible hand of governments, the orgy of currency intervention in Asia, the recycling of $50 a barrel oil by OPEC, and more recently a determined effort by U.S. firms to reduce under funded pension liabilities."
The last time the yield curve was inverted was in 1944. I, personally, like Greenspan's comments on the situation: "For the moment, the broadly unanticipated behavior of world bond markets remains a conundrum."
If you want to read more on the subject, this is a good paper just published by some academics from NYU.