Bond Rate Inversion

Discussion in 'Finance, Investing & Economy' started by Matt in the Hat, Dec 28, 2005.

  1. Matt in the Hat

    Matt in the Hat Moderator
    Staff Member

    Sep 21, 2002
    Brooklyn
    Club:
    New York Red Bulls
    Nat'l Team:
    United States
    Treasuries edged lower and the yields on the two- and 10-year notes inverted again Wednesday as traders shrugged off a better-than-expected reading on consumer confidence.

    In recent trading, the benchmark 10-year note was down one tick to yield 4.34%, little changed from late Tuesday, while the two-year Treasury was unchanged to yield 4.35%.

    http://www.thestreet.com/_tscs/markets/keynumbers/10259286.html

    I hear that this is bad. What does it mean?
     
  2. taylor

    taylor Member+

    Jun 9, 2000
    Fav team: FC CARL ZEISS JENA
    Club:
    --other--
    Nat'l Team:
    Germany

    Why is that bad, unless you mean, to imply an inverted bond yield curve? Which is a sign of on coming recession (at least it happened in 2001.)
     
  3. Matt in the Hat

    Matt in the Hat Moderator
    Staff Member

    Sep 21, 2002
    Brooklyn
    Club:
    New York Red Bulls
    Nat'l Team:
    United States
    Thats what I mean. Why is an inverted bond yeild curve a sign of recession?
     
  4. taylor

    taylor Member+

    Jun 9, 2000
    Fav team: FC CARL ZEISS JENA
    Club:
    --other--
    Nat'l Team:
    Germany
    I forgot most of it (8 years after college) but it is where the demand for long term bonds has increased relatively higher than the short terms bonds. Investors, therefore, look to avoid the "recession" while other investors eat it, and increasing the value of their long term bond, no less.

    The problem with that strategy, however, is that you can eat it as inflation escalates.

    That is the jist of it.

    Others can explain in more detail.
     
  5. taylor

    taylor Member+

    Jun 9, 2000
    Fav team: FC CARL ZEISS JENA
    Club:
    --other--
    Nat'l Team:
    Germany
    Wow, I meant 4 years after college. It really seems long ago...
    Double checking, what I said, it is when the value of the long term yields increases relative to the short term bond yield.
     
  6. bojendyk

    bojendyk New Member

    Jan 4, 2002
    South Loop, Chicago
    My wife forwarded me something noted by (IIRC) the chief North American economics fella at Merril-Lynch:

    "In the past 30 years, the yield curve has inverted 5 out of 8 times the Fed has been tightening monetary policy (in other words, raising rates). Each of those 5 times an economic recession has ensued one year later."
     

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