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Inversion Redux

Posted By Barry Ritholtz On January 20, 2006 @ 8:45 am In Economy,Fixed Income/Interest Rates | Comments Disabled

When the yield curve inverted late last year, some commentors claimed that the media made too big a deal of the 2 year bond yield slipping over the 10 year. We’ve had numerous commentaries [1] on the subject (but especially note these two December posts here [2] and here [3]).

Hmmmm, if everyomne made too big a deal about the 2/10 inversion last year, I wonder what these people think about Wednesday’s inversion of the 3 month/10 year bonds? I noticed an utter lack of response by the media or investors.

Here’s an excerpt from a well buried WSJ [4] article on the subject:

Yield_20060118_wsj [5]
"For the first time in more than five years, the yield on three-month Treasury securities ended the trading day above 10-year yields, a reversal of their traditional relationship. The phenomenon is known as an inversion of the yield curve, which has often signaled economic downturns."

. . . In late trading [Wednesday], the yield on the three-month Treasury bill stood at 4.356%. The 10-year note gained 1/32, or 31 cents for each $1,000 in face value, to yield 4.336% — or 0.02 percentage points less than the 3-month bill. The 30-year bond gained 1/32 to yield 4.515%.

The flip in three-month and 10-year rates is significant because some analysts and economists see it as a more reliable indicator of future economic activity than other measures of the yield curve, such as the difference between two-year and 10-year yields . . .

The Federal Reserve Bank of New York, for example, used the difference between three-month and 10-year rates to build a model of the historical relationship between the yield curve and recessions. According to that model, the present level of interest rates suggests about a 25% probability of recession within the next year. Since 1960, recessions have always followed sustained inversions of greater than 0.12 percentage points. In early trading yesterday, the three-month yield rose as much as 0.05 percentage points above the 10-year."


Complacency, anyone?


Bond Market Cranks Up Alarm But Many Investors Just Shrug [4]
THE WALL STREET JOURNAL, January 19, 2006; Page C6

Article printed from The Big Picture: http://www.ritholtz.com/blog

URL to article: http://www.ritholtz.com/blog/2006/01/inversion-redux/

URLs in this post:

[1] numerous commentaries: http://www.google.com/search?hl=en&lr=&c2coff=1&q=site%3Abigpicture.typepad.com+yield+curve+inversion&btnG=Search

[2] here: http://bigpicture.typepad.com/comments/2005/12/a_study_on_the_.html

[3] here: http://bigpicture.typepad.com/comments/2005/12/explaining_yile.html

[4] WSJ: http://online.wsj.com/article/SB113759944260549757.html

[5] Image: http://bigpicture.typepad.com/.shared/image.html?/photos/uncategorized/yield_20060118_wsj.gif

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