"Historically, a flattening curve pointed to a recessionary environment. However, historically the Fed was not running such a large balance sheet, rates were not effectively zero and we were not faced with a Fed attempting to remove accommodation into a sideways grinding economy rather than an actually strong outright growth profile," said Ian Lyngen, senior Treasury strategist at CRT Capital. "It's not clear to anyone that it's more than a strange residual to the fact that rates are so low and there was QE. ... But it does historically suggest a slowing of the broader economy."
Both the European Central Bank and Bank of Japan instituted negative yields and other easing programs. The Japanese 10-year yield was a negative 0.109 percent Monday while the 10-year German bund was near a historic low at 0.141 percent. That makes the U.S. 10-year's 1.75 percent yield relatively more attractive.
QE or quantitative easing is the program under which the Fed bought Treasurys and mortgage securities. Other central banks have similar programs.
RBS strategist John Briggs said the curve flattening is the result of stronger demand for long end, not a sell-off at the short end.
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"Usually a curve flattening when the Fed is raising rates means the front end is going up in yield. This is the long end going down in yields," said Briggs, head of strategy at RBS. The two-year was higher Monday at 0.78 percent.
"If the Fed is on hold and purposely generating an inflation overshoot, usually that leads to a curve steepener. I think it is interesting that the curve is flattening with the Fed on hold," he said. "I think what we're seeing there is the overall need for yield in a world bereft of yield."
Jim Caron, fixed income portfolio manager at Morgan Stanley Investment Management, said the fact that the curve is the flattest it's been since before the financial crisis is not really meaningful.
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"As long as the market perceives international weakness (see China's weak data released over the weekend), then back-end yields will stay low and the curve will flatten," wrote Caron in an email. He said there is a disconnect between what Fed funds futures say about a very low probability of a rate hike in June, at just 6 percent, and the yield curve.
"But you wouldn't have guessed that by the recent flattening of the curve. Essentially, the yield curve move is giving you little info about the Fed. It's mainly international," he wrote. "I assign no significance to the curve being flatter than 2007 as a result."