The following are some excerpts from some commentary by Eric Roseman that was included in a recent issue of The Sovereign Society’s Offshore A-Letter: When the rate of return for short term investments exceeds that of long term investments (the yield curve “inverts”), it is generally a sign of bad economic times ahead.
Over the last two years, investors have barely kept pace with inflation in benchmark intermediate term US Treasury bonds. After enjoying a massive rally since 2000, bond yields hit a 40 year low in 2003 at 3.3%. Despite thirteen Federal Reserve rate hikes since June 2004, bond yields have actually declined twenty basis points (0.20%), a worrisome signal Chairman Greenspan called a “conundrum” last fall. Yield curve inversion is a dangerous anomaly because it portends to economic weakness; the last three inversions all resulted in economic recessions.
Indeed, the bond market might be signaling big trouble for the US economy in 2006. The benchmark yield curve, or the difference between the two-year and ten-year Treasury yields, inverted in late December. An inverted yield curve occurs when short-term interest rates yield more than long-term interest rates. This phenomenon is a rarity in bond markets and typically indicates that bond investors think the US Federal Reserve is tightening the monetary screws too aggressively. If this is the case, then there is a good chance that the United States might suffer a recession later this year, especially if the yield curve stays inverted. – Eric N. Roseman, Montreal, Quebec. Editor, Renegade Investor E-mail: enr@qc.aibn.com Web site: http://www.eas.ca
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