Saturday, July 29, 2006

Inverted Yield Curve



Above is a big graph showing the yield spread between the 20 Year Treasury and 10 Year Treasury (Green Line), the 10 Year and 5 Year (Red), and 10 Year and 1 Year Treasury (Black). Click on the graph for a larger (readable) graph. On the graph, the yellow shaded area represents a bull (declining) market whereas the black bars along the bottom represent economic recessions. Yes, I have adapted Joseph Ellis' graphical method to my analysis.

Obviously, as the spreads reach zero, the bond curve is flat. If the spread is negative, then the yield curve is negative. For instance, in 1989 and 2000 the yield curve was negative and a bear market and recession followed.

Currently, despite the Federal Reserve's attempt to raise long-term interest rates, they have only been successful in raising the short end of the curve. As a result, the yield curve is slightly negative.

Does this predict a bear market and/or recession? Who knows, but I am really concerned that a slowing economy, rising inflation and the flat yield curve cannot be taken as anything but indication of bad economic times ahead.

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