Saturday, June 09, 2007

The Treasury yield curve is normal again (not inverted)

Finally, as if by magic, the Treasury yield curve reverted to "normal" this past week rather than being inverted as it has been for many months. The open question is what the significance of the change really means, other than the obvious superficial definition. Some people had insisted that an inverted yield curve absolutely meant that the economy was headed for a recession. For them, I guess they would now have to believe that the U.S. economy is not headed for a recession. For others, the inversion had no indicative meaning but simply meant that demand was high for longer-term Treasuries, possibly due to demand from China or wherever. So, maybe the outsize demand has simply at least partially evaporated. The real bottom line is that the shape of the Treasury yield curve is in a state of flux and that we should wait a few weeks or a month or two before trying to definitively characterize the state of the curve. At a minimum give the Treasury market at least a week for the dust to settle before even starting to think about what all this means.

There was also chatter related to some comments by "Bond King" Bill Gross of PIMCO, suggesting that he was now bearish on longer-term bonds.

As of Friday, the yields for the variaous point on the Treasury yield curve were (according to Bloomberg.com):

  • 3-month: 4.76%
  • 6-month: 4.92%
  • 2-year: 4.99%
  • 3-year: 5.02%
  • 5-year: 5.04%
  • 10-year: 5.11%
  • 30-year: 5.21%

What I find interesting is that all of these rates are below the Fed's federal funds rate target of 5.25%, which means that the U.S. government is still funding the federal deficit at rather cheap rates.

-- Jack Krupansky

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