Inverted Yield Curve = Recession

[PD]

I read an article today by Robert Aronen of The Motley Fool.

He wrote:
“The yield curve is inverted again. What does this mean? I don’t know, but an inverted yield curve has occurred before each of the past four recessions. If the Fed raises rates again, it will be even more inverted. How can we possibly survive?”

Check out his article for more bad news about the markets and housing:
http://www.fool.com/news/mft/2006/mft06060908.htm?source=eptyholnk303100&logvisit=y&npu=y&bounce=y&bounce2=y

[Nonbeliever]

5.008 vs 5.009 is hardly going to “Break the Bank”, but if we see a more substantial curve inversion for a longer period of time it will put a lot of pressure on the lenders as they borrow short for a higher percentage than they lend long. The curve inverted earlier this year if I remember correctly, but it too was not very substantial. If bonds make a move from here it could be the harbinger since good old Ben seems to be ready to raise again.

[powayseller]

Why do people like Bill Fleckenstein insist the Fed is done, or wants to be done? I really think they want to curb inflation, cool the economy. Or do they only want to give the impression they will curb inflation? As Ben B has said, managing inflation expecations is important to prevent inflation from taking hold.

[carlislematthew]

How many times in the last few decades have we had an inverted yield curve that did NOT result in a recession? Serious question… I believe I heard that it has happened quite a few times.

[powayseller]

It happened a few times. What matters is the depth and length of the inversion. So it’s not the fact that it happened, but a sustained economic condition which brings it about.

This time the reversal is due to a different factor, namely the foreign central banks who have hundreds of millions of dollars they need to invest. They got those dollars when they exchanged their manufacturers’ dollars for yen, yuan, baht, etc. They don’t want to convert the dollar into their own currency because that would make it appreciate, so they invest it back in the US.

This glut of dollar looking for Treasury debt raises demand, pushing down yields.

So, the more we import, the lower our long term bonds get.

The last few months, the trend is for imports to become a little less. So eventually the bond curve will normalize, and then we will see 30 year mortgages go up.

[Author]

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