Posts filed under “Fixed Income/Interest Rates”

Inversion Redux

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 on the subject (but especially note these two December posts here and here).

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 article on the subject:
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Yield_20060118_wsj
"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."

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Complacency, anyone?

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Source:
Bond Market Cranks Up Alarm But Many Investors Just Shrug
MARK WHITEHOUSE
THE WALL STREET JOURNAL, January 19, 2006; Page C6
http://online.wsj.com/article/SB113759944260549757.html

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