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Ignore Inverted/Flat Yield Curve at Your Own Risk

Posted By Barry Ritholtz On July 1, 2006 @ 11:34 am In Data Analysis,Economy,Federal Reserve,Fixed Income/Interest Rates,Markets | Comments Disabled

We have discussed the impact of an inverted yield curve repeatedly in the past [1]. Much of the mainstream has denigrated the historical record of using this relative unusual relationship between yields as an indicator. They have strained credulity to somehow reach the conclusion that it really is different this time.

From Birinyi Associates, here is the recent track record of what they call "Intentional curve inversions:"

Intentional_inversions [2]

Source: Ticker Sense [3]


This seems pretty conclusive that there is a correlationn between the shape of the curve and subsequent recessions.

And these tidbits from Jim Stack of Investech Research agrees. He points out:

• The flat yield curve shows an 88% probability of a recession beginning sometime between now and the end of next year.

• The yield on the 10-year Treasury Bond hit new 4-year highs this week.

• Even excluding energy, the CRB Spot Raw Materials Price Index is showing the highest 4-year inflation
rate in 25 years.

• Of the past 10 tightening cycles by the Fed, only 2 resulted in a soft landing (without recession).


Intentional Inversions [3]    
June 30, 2006   

Neutralizing risk
Jim Stack
Vol06 Iss08
Technical and Monetary Investment Analysis
Investech Research, June 30, 2006

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

URL to article: http://www.ritholtz.com/blog/2006/07/ignore-invertedflat-yield-curve-at-your-own-risk/

URLs in this post:

[1] repeatedly in the past: http://www.google.com/search?hl=en&lr=&q=site%3Abigpicture.typepad.com+inverted+yield+curve&btnG=Search

[2] Image: http://bigpicture.typepad.com/.shared/image.html?/photos/uncategorized/intentional_inversions.jpg

[3] Ticker Sense: http://tickersense.typepad.com/ticker_sense/2006/06/intentional_inv.html

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