The Flattening Yield Curve

What started making me look into bonds (which spurred me to write the last article) today was this article on Bill Cara’s site, “It’s all in the slope, folks,” which suggests that the yield curve in the US is starting to look like it did in 1999, and that it is getting close to being inverted, which has often signaled the start of a US recession in the past. He used this really neat applet to look at the yield curve at any point in the last 7 years. Here are his predictions:

Note the similarity between the yield curve of today and as at year-end 1999.

If yields of today jumped to those of 1999-2000, by roughly +150 basis points across the board, then I believe that the present housing market bubble would pop, rather than have the air let out slowly as is now happening.

Should the Treasury continue to print money the way it has, and the way it must in order to meet the fiscal deficit of government, then there will be inflationary pressures.

And should the Fed continue to raise rates the way it has, and the way it must in order to stabilize prices (i.e., combat inflation), then the more downward pressure there will be on economic growth. These are also deflationary pressures.

As long as the U.S. Treasury continues to reflate, and the Fed continues to tighten, the yield curve will continue to flatten, and will soon invert, similar to what happened in 2000.

According to the Wikipedia article on Yield Curve:

An inverted curve occurs when long-term yields fall below short-term yields. Under this abnormal and contradictory situation, long-term investors will settle for lower yields now if they think the economy will slow or even decline in the future. An inverted curve may indicate a worsening economic situation in the future.

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