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Inverted Yield curve for bonds?
Old 07-22-2005, 10:55 PM   #1
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Inverted Yield curve for bonds?

I'm certainly not a bond expert, but as close as I can figure long term rates are bound to inch upwards, or the yield curve for bonds will become inverted. Check my logic. The yields for short term and intermediate term CD's per ING and other sources seem almost flat. Greenspan has continued to insist that short term rates will rise at a measured pace. Additionally Greenspan has made some rather cloaked references and concerns to high housing prices. Higher long term rates are one thing that could temper RE prices.

I've done my best trying not to second guess intermediate or longer term bond rates, but it just seems to my that something has to give. Though maybe slowly. The alternative is an inverted yield curve which historically has been a predictor of recession.

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Re: Inverted Yield curve for bonds?
Old 07-22-2005, 11:23 PM   #2
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Re: Inverted Yield curve for bonds?

Hi Roger_R:
Quote:
The alternative is an inverted yield curve which historically has been a predictor of recession.
Jeremy Siegel made that exact same point in the most recent Kiplinger's magazine, warning that the last 8 recessions since 1950 were preceeded by a flat or inverted yield curve. And we are close to flat now, it appears.

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Re: Inverted Yield curve for bonds?
Old 07-23-2005, 06:59 AM   #3
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Re: Inverted Yield curve for bonds?

Greenspan was asked about the predictive power of an inverted yield curve, and stated that it used to be quite a strong predictor. However, it has gotten to be less and less of a predictor as the banking system became less and less important to the total economy. Banks make a lot of their money on the spread between short and long rates, and don't make much when the curve inverts.
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Re: Inverted Yield curve for bonds?
Old 07-23-2005, 07:06 AM   #4
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Re: Inverted Yield curve for bonds?

Several of the banks are continuing to do fine since many "hedge" on their mortgage back securites. My sister does this for a living. My regional bank stock investment also had pretty good earnings this last quarter helped out a lot from hedging.

I dont know if that always been the case in the past.
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Re: Inverted Yield curve for bonds?
Old 07-30-2005, 08:27 PM   #5
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Re: Inverted Yield curve for bonds?

After pondering your post, I came up with the following:

I think Greenspan was saying that banks' role as more or less exclusive financial intermediaries formerly caused the problem.* When rates inverted, banks slowed traditional lending, in favor of alternative money making strategies (such as the one you pointed out).* These alternative money making strategies did not provide adequate capital to business, so the economy slowed.* This happened regardless of whether banks made money on the alternative strategies or not.

Now a days, there are so many alternative ways for businesses to raise money, that it doesn't matter as much whether banks slow traditional lending during periods of inverted yield curves.
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