Monday, January 08, 2007

Inverted Yield Curve

The link above is to a story in the WSJ about the inversion of the yield curve and the likelihood of a recession.

The bond market is having relationship issues that are getting harder to ignore.

Normally, yields on long-term government bonds are higher than yields on short-term ones. Investors demand a bigger return for the risk that comes with holding an investment that takes longer to repay.

The relationship has been upside-down since July, however, with yields on short-term U.S. Treasury bills exceeding those on long-term Treasury notes. Late Friday, the yield on the three-month Treasury bill stood at 5.05%, well above the 4.648% yield on the 10-year note.

This unusual state of affairs -- known as an inverted yield curve -- has gone on longer than many economists expected and has some wondering whether the bond market is signaling that the economy itself could turn upside down.

Even non-Wall Street types are starting to notice. Charlotte Observer sports columnist Rick Bonnell likens an inverted yield curve to a basketball player whose shooting percentage is lower at the free-throw line than from the field. It's uncommon and nerve-wracking.

That last paragraph is the interesting one. If sportswriters in Charlotte are talking about the inverted yield curve, then it's importance must have slipped a bit. Frankly, I don't want my sportswriters to even know what a yield curve is much less that it happens to be inverted. I've been watching Shaq shoot free throws in Miami for the last two years and while it is painful, it doesn't make me think of yield curves.

I don't anticipate a recession this year. A slowdown in growth is already evident and I think that is as far as it will go. That is, of course, subject to revision.

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