>The spread between the two year Treasury note at 3.7% and the ten year
>Treasury bond at 4.3% is now a little more than a half-percentage point, a
>quarter-point below its historical norm. When the spread has narrowed like
>this in the past, it has signalled an economic slowdown, as indebted
>consumers struggle to meet their interest payments in a low inflation
>environment.
One theory of why the yield curve matters: Short rates are determined largely by central policy, while long rates are determined by the credit markets. It's not easy to say what a "high" or "low" interest rate is. You can have high and rising rates during a boom, and very low rates in a depression. But if the yield curve flattens, or goes negative (short rates higher than long), that suggests that the central bank is forcing rates higher than they'd otherwise be - "unnaturally" so - thereby slowing down the economy. So in that light, this doesn't hold water:
>Some economists surveyed by the Journal, though, say that the yield curve is
>no longer a reliable indicator.
Beware of pundits who say it's different this time. It usually isn't.
>The unexpected
>higher rate of job growth reported last week has also been cited as evidence
>that the direction suggested by the yield curve is misleading.
Wow, a lot of strong conclusions being drawn from a single figure!
>Lately, Mr. Market hasn't been a very good forecaster, says Joseph LaVorgna,
>chief U.S. fixed-income economist at Deutsche Bank in New York. Back in the
>mid-1970s, he says, the yield curve and economy moved up and down together,
>with the curve leading the economy by about a year. But by 2001 that
>correlation had broken down.
Hmmm, one contrary instance - following the bursting of an extraordinary bubble - and it ain't true no more. LaVorgna must have gone to the Carrol Cox School of Generalization.
Doug