Inverted yeild curve

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Jan 24, 2006 3:06 pm

Can you guys believe that the 1 year Govy is paying .55 bps over the 10 year Govy?!!


Hmmmmmm.  Since the main buyers of gov bonds tend to be the smart (I know "smart" is relative) money (governments and institutions) what do y'all think this means?


recession, stock market drop, catacalysm, armageddon?


Maybe just sheer stupidity?  (why would someone take 1/2% less and lock their $$ up for 10 years)  seems unlikely to me.


It seems as if there is some serious tension mounting between the bond and stock buyers. 


One is saying Doom and Gloom, the other is Boom and Zoom?

Jan 24, 2006 5:32 pm

Here's the latest from Wharton Business Press on the subject.



http://knowledge.wharton.upenn.edu/index.cfm?fa=viewArticle& id=1362



Jan 24, 2006 6:59 pm

Of course Sonny, but why LONG TERM debt.  This says something about their expectations doesn't it?  They could be earning 1/2% more in short term debt.  

Jan 24, 2006 7:14 pm

I read the wharton site and it is basically repeating what I've been reading all along.  I don't necessarily buy it though. 


Traders think inflation will remain low?  What about rising commodity prices (oil, steel etc....).  There seems to be a sharp contradiction in the markets now, on one hand you have the developing nations pumping on all cylinders creating intense demand for resources driving the prices of inputs up, putting upward pressure on inflation, world political tension in the middle east creating a risk premium for oil (also possibly putting upward pressure on inflation), lots of liquidity (from relatively cheap $) sloshing around out there (more inflationary pressure).  Gold is hitting highs (reflective of inflation concerns).


Yet, BIG BIG $$$ is flowing into Long term government bonds.


Makes me think, that's all.

Jan 24, 2006 7:51 pm

People buy long term debt, with a lower rate than short term debt, because they believe rates will go down.


As a rookie, I used to pull my hair out worrying where rates were headed. Now, I just ladder the maturities and I have the hair to show for it!

Jan 24, 2006 11:11 pm

Doberman, my thought exactly.  But why would the Fed lower rates during a robust economy?  I'm not asking these questions from the standpoint of investing $ in bonds for clients, but to get a pulse on market sentiment.


SonnyClips,  I like your reasoning and it has some parallels to my thoughts.  If interest rates go up from here they stand to loose principle or lose to inflation.  They must have good reason to believe rates will go down (unless as in the "analyze this" post, there is the ulterior motive of keeping home equity dollars flowing into their products).


Now the conundrum here is that they (the chinese) supposedly are putting upward pressure on commodity prices (through building infrastructure and an increasing consumer market), which supposedly increases the cost of producing and delivering goods and therefore increasing the prices charged for goods resulting in inflation?  Maybe they (the Chinese) think that we're in for a slowdown (along with them)?  If that is so, what would it mean in the short term for commodity prices (maybe a short term drop?)  


Now here's a question for the more educated:  what caused oil prices to collapse in 1985?  (I'm asking because I don't know).  I certainly think long term oil and commodities are great, but short term the markets can be very fickle.