May 25, 2006

FLASH: Yield curve inverts again - 10 year below Fed Funds rate

And the smart folks in the room know what that means

7 comments:

alan greesnspam said...

No, what does that mean?

Anonymous said...

Essentially, it means people are wary of investing money more long term because if they do so, they are worried that rates and inflation will go up. If this happens, then the value of their longer term investment will go down because potential purchasers of your investment (bonds and other debt) could get a better return by investing at higher interest rates rather than buying your lower yield long term debt.

It's a sign on insecurity. If your money is tied up short term, you can quickly move it to an investment yielding a higher interest rate.

Chris G said...

That's not a true inversion of the yield curve because the Fed funds rate is not on the yield curve...but it does spell potential trouble. I guess one can engage in the ongoing debate of how much these foreign countries really want to buy our long-term bonds, which have helped keep those rates fairly low on a historical basis.

Anonymous said...

does anybody know anything about the recent patterns of foreigners buying the long term bonds?

Where is this going and how will it afect the housing market?

Anonymous said...

Here is some data from the US Treasury (through Mar. 2006):

http://www.treas.gov/tic/mfh.txt

Looks like Japan's ownership of treasury securities is shrinking. China's was still growing from Feb. to Mar.

An economist I'm not, but I suppose when demand for US paper shrinks, that says something about the world's confidence in the US dollar as the reserve currency.

S

Awaiting Bubble Rubble said...

I agree with chris g. It's not really an inverted yield curve. In fact, the recent correction in emerging markets might generate a flight to quality (including US paper) in the near term. It's really at a very delicate turning point just now. I'm expecting some mild gains in major US stock indices and will dump most long positions then (June-July) before the real inflation data and foreclosures start hitting in Sept.

Opened Eyes said...

Long term rates are lower because there are more buyers for them, (prices thus are higher) presumably because they think rates will be lower in the future, because of a recession, or, as I hope, a depression that causes societal collapse.