Thursday, January 12, 2006

Don't Sweat the Inverted Yield Curve: No One Really Knows What It Means - Knowledge@Wharton

Yield curves (the graph of yield on a class of bonds to their time to matuiry) are usually upwards sloping. That is, you generally get a higher rate the longer you go out in time.

However, that is not always the case. Indeed, if you watch the living yield curve, you see that occasionally the yield curve is flat, and at other times (such as now) it is inverted with longer term rates being lower than short term rates.

Economists, and others, have a difficult time determining what this means. One common reading as the yield curve becomes inverted, it is a signal that in the future demand for money will be lower and since this happens in a recession, it suggests a possible recession ahead. Unfortunately (or fortunately as the case may be), this is a very noisy indicator.

Wharton's Knowledge looks at this issue this week. It is well worth a quick read!

Don't Sweat the Inverted Yield Curve: No One Really Knows What It Means - Knowledge@Wharton:
"The Treasury bond yield curve inverted December 27 for the first time in five years. That gave shudders to those who see the phenomenon as a harbinger of recession. And yet, the U.S. economy is strong, and surveys show most forecasters think it will stay that way. So what does the inverted yield curve really mean?

'I think it sometimes portends a recession, sometimes not,"

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