Wednesday, February 08, 2006

Now I Understand (I Think)

If you are baffled by the talk on business programs of inverted yield curves (that is, where the interest yield on long-term federal bond rates falls below the federal funds rate), there's a great CRS primer available. The report is entitled The Pattern of Interest Rates in 2006: Could It Signal an Impending Recession?

The answer the report gives to the specific question posed by the title is "I dunno." However, the report explains without technical jargon (i) what an inverted yield curve is and (ii) why an inverted yield curve frequently heralds a recession. Additionally, the report addresses those instances (particularly the one in 1998) in which a recession did not follow an inverted yield curve. (The '98 inversion was caused by a "flight to quality" due to political and financial instability in other parts of the world.)

1 comment:

The NJ Annuitant said...

I have my own, totally selfish , reason for wanting low 30-year rates, inversion or no. On or about April 1, I will received a lump sum from a qualified pension plan. The lower the 30 year rate, the bigger the lump sum ( and the more annuity it buys).
What I think the inverted, or even flat, yield curve is telling us is that investors believe that ,in the long term, inflation will be under control. That is not an unhappy message.