In most of the time, bond-rate curve becomes inverted and it is an indication of a recession. So that in recession, we will be able to see the inverted curve. What causes the curve to bend like that?
Submitted by Eugene on February 21, 2008 - 3:19pm.
IIRC bond-rate curve becomes inverted before the recession. It's the first sign that the recession is coming. Traders think that 1) stock market may be overvalued; 2) the recession is coming, therefore the Fed will have to lower the rates, so we should lock in high long-term rates; it's better to invest your money for guaranteed 5% for 10 years ahead of time if you think that yields on 1-year bonds may come down to 2% for a while. Money flows from stocks and short-term bonds into long-term bonds.
This time the curve got inverted in mid-'06 and remained inverted till mid-'07.
Now that we hear a lot of recession talks, but how come the curve is not inverted anymore?
Another question is that if more money coming from the stock market and short-term bond to long-term bond, then should the 10-yr or other longer term bond rate reduce?
ddm, I believe so, and I believe the curve is no longer inverted (temporarily at least) because the FED slashed rates 125pts in the last 30 days. Someone correct me if I'm wrong.
IIRC bond-rate curve becomes inverted before the recession. It's the first sign that the recession is coming. Traders think that 1) stock market may be overvalued; 2) the recession is coming, therefore the Fed will have to lower the rates, so we should lock in high long-term rates; it's better to invest your money for guaranteed 5% for 10 years ahead of time if you think that yields on 1-year bonds may come down to 2% for a while. Money flows from stocks and short-term bonds into long-term bonds.
This time the curve got inverted in mid-'06 and remained inverted till mid-'07.
Now that we hear a lot of recession talks, but how come the curve is not inverted anymore?
Another question is that if more money coming from the stock market and short-term bond to long-term bond, then should the 10-yr or other longer term bond rate reduce?
ddm, I believe so, and I believe the curve is no longer inverted (temporarily at least) because the FED slashed rates 125pts in the last 30 days. Someone correct me if I'm wrong.
The curve is no longer inverted, it has been rising sharply actually in recent weeks, far from inverted presently.