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Thread: Monty & experts - what do you make of flat/inverting treasury yield curve ?

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    Banned Melonie's Avatar
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    Default Monty & experts - what do you make of flat/inverting treasury yield curve ?

    As of today, treasury yields have gone flat or inverted from the 6 month through the 7 year maturities. Traditionally a flat yield curve precedes an economic slowdown, and an inverted yield curve precedes a recession. What do you make of this 'traditional' economic leading indicator ?

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    God/dess montythegeek's Avatar
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    Default Re: Monty & experts - what do you make of flat/inverting treasury yield curve ?

    Melonie,
    you gave a link, so I will too. http://finance.yahoo.com/bonds/composite_bond_rates

    Look at why the yield curve has flattened (It has not inverted- inversion is classically measured as the 10yr-1yr).
    The longer term bonds have come down. the spread between the 2-yr and the 10-yr has narrowed--but it is because the 10-yr came down. If the yield curve inverts, what matters is not THAT it does--it is WHY it does. The times the yield curve really inverted was because the Fed had tightened to fight inflation. A minor inversion is irrelevant since the short end is 95% monetary policy and 5% market and the long end is the reverse-95% market 5% policy. Normal market moves can get these out of whack a few (10 or less) basis points and it means absolutely nothing.

    Current monetary policy is not tight-it is quite neutral. The low 10-year is because people do not expect inflation to rise, which is good because the Fed does not have to tighten much more, and that is already priced into the near-term yields. The low inflation expectations of the bond market happen also to be the reason I think the gold market is whacko in expecting inflation. The bond market is bigger and more liquid and says people who buy gold are suckers--the bond market always wins these differential expectations.

    The spread also got very narrow in late 1995 --6 years before the recession and in 1998-3 years before a recession, and it was all because inflation expectations were declining.

    Do not assume that something like inversion is per se meaningful--that is the oldest fallacy in economic--the post hoc ergo propter hoc fallacy ( "after this, therefore because of this." for those who never took LAtin or were not altar boys before 1965)

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