NEW YORK (AP) ? Stock investors generally embrace low interest rates; they tend to reduce corporate borrowing costs and boost profits.

But there?s low ? and there?s too low, and that?s what we may be seeing now. As the Federal Reserve has hiked the overnight bank lending rate over the last 15 months from one percent to 3.75 percent, longer-dated securities haven?t followed. The yield on the Treasury?s ten-year note has fallen from 4.76 percent just before the Fed started cranking rates higher in June 2004 to 4.29 percent on Monday

Should that disconnect continue, it could put more downward pressure on equities in the months ahead, especially in financial stocks because their profits are so closely tied to rate spreads. That, of course, would be very disappointing given that best time of the year for investing is about to begin. There have been big gains tallied in October for the last five years, and the final quarter historically tends to churn out superior returns.

If that happens, it would be a welcome change from what investors experienced over the summer. Even though many market strategists had been expecting some solid share price gains in recent months, rising oil prices unnerved investors. Those fears only became more exaggerated after Hurricane Katrina sent energy prices soaring even higher, boosting concerns about slowing economic growth.

Despite all that, the Fed has stuck to its policy of gradually raising short-term rates at what it calls a ?measured pace? to keep growth in check while containing inflationary pressures. But the lack of a corresponding rise in yields on longer-dated Treasury securities is something that has even baffled Fed Chairman Alan Greenspan, who earlier this year called the situation a ?conundrum?.

This could be occurring because foreign central banks continue to buy long-term bonds, which drives up prices while holding down yields. Or there could just be technical factors fuelling the government bond market?s recent behaviour.

Regardless, what is known as the yield curve has flattened. The yield on the Treasury?s two-year-note, the maturity most sensitive to Fed moves, is now at 4.06 percent, putting it only 23 basis points below the 10-year note?s yield.

That?s a steep drop from the more than 200-point spread seen a year ago, when a graph showing those and other rates would have had a much more upward sloping curve.

For stock investors, this could mean trouble. To start, should the yield curve invert ? and short-term rates move higher than long-term rates ? it could signal an economic recession. Not immediately, but it historically is a good predictor of an economic pullback.

And in the months before an inversion, gains in equity markets tend to cool down. Research dating back to 1976 by JPMorgan Asset management senior economist Anthony Chan found that the Standard & Poor?s 500 stock index saw its annualised returns go from 11 percent a year before the inversion of the curve to 8.6 percent three months prior to the inversion.

Looking at the current market, Bear Stearns chief investment strategist Francois Trahan found that the relationship between stocks and bonds began to change in June, when the slope of the yield curve dipped below 100 for the first time. Since then, the ten-year Treasury bond yield has been moving in lockstep with the S&P 500.

?On days where bonds rally and yields decline, equities are not finding valuation relief, as they so often have in the past,? Trahan said. ?In other words, we are now in a world where lower bond yields hurt more than help.? Trahan also points out how the slope of the yield curve often follows a similar path as earnings coming out of the financial sector, which happen to be the largest segment in the S&P 500.