Flat Yield Curve!

Friday, February 24, 2006 | 11:45 AM

Mark Thoma asks: When should we worry about the yield curve?


   

Yield_diff_nov05

Chart courtesy of Angry Bear

Note that each inversion (spread < 0) preceded a recession.

Here's how falt we are:

FED Funds Rate: 4.5% (overnight)
6 Month CD 4.37%
Five Year Note: 4.54%
Ten Year Note: 4.54%
30 Year Bond: 4.53%

Let me remind you that last year, the S&P500 gained about 4% -- about what you would get from a CD, but with quite a bit more risk.

That factoid is another element why if the market starts to fade, more than a few equity holders will see it as an unpleasant repeat of 2005.

I can imagine that during any "unpleasantness," the so-called weak hands will dominate not only  the selling, but the lack of buying interest, too.

Friday, February 24, 2006 | 11:45 AM | Permalink | Comments (17) | TrackBack (0)
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It's interesting that State Street's professional money manager survey is showing the most bearish reading since it started 8 years ago at the same time the retail investor is piling in. And, they are piling in the the highest risk markets, international. The pro's record isn't one of greatness since they were also suckered into being bullish at the top in 2000 but it's better than the retail investor.

So, with negative volume since the end of December being higher than it was from the decline into October, while we are sitting at a peak in the indices, what does that mean? Can you say DISTRIBUTION? So, if the pro's are leery, who's going to bid up stock prices? Retail investors? I am a big fan of risk adjusted returns. I'm quite happy with 4+% which will soon be 5%.

Still think the long bond rates are going higher. It's only a matter of when. IMO. Once the traders realize a slow down will likely not stop inflation, they'll jack up rates. Alot of differing opinions on the long end. Place your bets.

Posted by: B | Feb 24, 2006 12:03:54 PM

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