Yield Curve Inversion past May???

I saw at Angry Bear this Market Watch item with the following lede:

The Treasury yield curve turned completely upside down early Friday, pushing the 2-year yield above the yields of both the 10-year and 30-year instruments, intensifying a debate over whether the inversion signals a looming recession.

The inverted yield curve effectively undermines the incentive for making long-term loans.

Kash notes that this is a full inversion of the yield curve

“Given that this morning the 30-year yield is 4.48%, the 10-year yield is 4.52%, the 2-year yield is 4.63%, and the 6-month T-bill yield is 4.67%, I guess that fairly qualifies as a modestly, but fully inverted yield curve. I stand by my earlier assessment that this is a Not-Very-Good-Sign for the economy in 2006.

Dave Altig at Macroblog performs a vital and useful service in posting weekly implied short term interest rate probabilities. This week’s probabilities are not pretty:

The easiest interpretation of this chart is that there is a slightly better than 90% chance that there is at least one more quarter point hike in short term rates by May 2006. Right now there is little upwards pressure against the long end of the yield curve as there is significant demand for the newly reissued 30 year T-bills by major institutional investors. So it looks reasonably likely that we could be seeing at least another three months of inversion and that this inversion could deepen.

Leave a Reply

Your email address will not be published. Required fields are marked *

Connect with Facebook