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Yield Curve Flipped

This article was written by in Economy. 22 comments.


Earlier today, the yield on long term Treasury notes was lower than that on short term Treasury notes, creating an “inverted yield curve.” This is a fairly popular economic indicator, and just about every time this has happened in the last thirty years, the U.S. economy headed into a recession.

It’s likely not a cause-effect relationship; usually there are other factors to could cause both the inverted curve and the recession, but the two situations are tightly linked. Most economists seem to think that this time we’re not headed for a recession.

If we do enter a recession, we could always unload our huge properties for spending cash… Then again, I don’t see that happening.

Updated February 7, 2012 and originally published December 27, 2005. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.

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About the author

Luke Landes, also known as Flexo, is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about him and follow Luke Landes on Twitter. View all articles by .

{ 11 comments }

avatar FMF

Did you somehow turn into Alan Greenspan when I wasn’t looking? I can’t understand this a bit. Is there an English version of it for the common man? ;-)

avatar Luke Landes ♦127,365 (Platinum)

Hmmm, I’ll break it down a little.

Almost every time red light flashes, economy goes bad. Red light flashes for a few minutes. Will economy go bad? Most people say no.

Bond yields are based on what people think interest rates will be throughout a bond’s maturity. When long bond rates go down while short bond rates go up and they pass each other, it sends a signal that people aren’t thinking too highly about the economy in the long term.

More info from Investopedia

avatar FMF

Ok, thanks for the translation.

Thoughts on what people think:

*This year’s high Christmas spending seems to indicate people are ok with the economy for now.

*I never pay attention to what people think. They’re usually wrong. ;-)

avatar Luke Landes ♦127,365 (Platinum)

I agree that people are generally wrong (except in examples of mob wisdom), and I tend to go for the contrarian approach. But what to do when both opinions are more or less evenly divided or the prevailing trend of opinion claims to be contrarian?

avatar FMF

What do you mean “what to do”? Do you mean as far as investments, cash savings, or what?

As you might guess, I have an opinion, but just need clarification to give you the “right” answer. ;-)

avatar Luke Landes ♦127,365 (Platinum)

Well, it was more of a rhetorical question, but the question is whether to side with the “contrarian mob” or the “non-contrarian mob.”

avatar FMF

Side with them on what? Do you mean just philosophically?

avatar Luke Landes ♦127,365 (Platinum)

Basically. :> I’m talking about the broad issue … or in this case, the course of the general economy in 2006 … for the people like me who believe that the consensus is generally wrong and it pays off to bet against popular opinion (while hoping everyone else follows popular opinion), the issue arises of what to do — go against the grain or with it — when the popular opinion is believed by the masses to be contrarian.

avatar FMF

Ok, so when you say you’re deciding to go against the grain or not, you mean just as an intellectual pursuit? I don’t mean to be dense, I’m just wondering.

If this is indeed the case, I’d simply say “what does it matter?” It doesn’t have any real practical application (in other words you’ve said — or at least implied — it’s not going to influence anything you do) to your finances, so move on. Focus instead on working to save more, spend less, and the like and you’ll be better off no matter what happens.

Then again, maybe that’s just the “practical Polly” in me coming out and you should go back to theorizing. ;-)

avatar Will Kirby

I must admit, this is one of the more interesting “comments” discussions I’ve seen in a while! Just to interrupt the back and forth you two have had – the inversion of the yield curve scared me to death! I have had a great momentum play on Google stock and sadly it wasn’t included in the S&P yesterday. So, I feared that the inversion of the yield curve coupled with the failure of the S&P to include it would be terrible! Thankfully, no such trouble!

avatar FMF

Will –

THAT’S what I was looking for!!!! A reason to care about this!!!

Alas, I’m an index fund investor and as such ignore “momentum plays” and the like. It helps me sleep better at night. ;-)

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