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To: Lee who wrote (30691)	2/9/2000 3:32:00 AM
From: IQBAL LATIF	Respond to of 50167

Lee.. recently we have seen a lot of discussion on alleged inverted nature of the yield curve, some inverted yield curves have benign qualities according to this article by Mr Bollinger... interesting and very informative.. his conclusion <<we have this mix-and-match type of yield curve inversion, some tightening and some supply constraint. While this is not a horrid situation, it is not a great one either. As with so many other things--financial and otherwise--we find ourselves on the cusp. The yield curve has become simply another source of uncertainty in an already uncertain world.>> <<Is the Yield Curve Inverted? By John Bollinger, CFA, President Bollinger Capital Management Posted Tuesday, February 08, 2000 at 09:41 AM EST And, if so, what does it mean? Let's start with a description of the yield curve. Plot an xy chart with bond maturity on the x-axis (m for month, y for year) and Treasury yields on the y-axis. Connect the dots. Voila, a yield curve. Like so at present: 6.7 * 6.6 * * * 6.5 * 6.4 6.3 6.2 * * 6.1 6.0 5.9 * 5.8 5.7 5.6 * 3 6 1 2 3 5 7 10 30 m m y y y y y y y The typical shape is an upwardly sloping line, a "normal" yield curve. The high point on today's curve, as you can see, is at 3 years and the curve slopes down from there. This is the inversion everyone is talking about. For most of my early career the yield curve was inverted in much the same way it is now. That was because a very strong bid for long-maturity bonds drove their yields down. The peak was typically around ten years. This bid was generally ascribed to insurance companies. It was thought that they bought long bonds to match the very long durations of their liabilities--you have to fund all those life contracts with something. That is one type of inversion, generally thought to be benign. The other type is caused by a tightening of fiscal and monetary policy that drives short-term interest rates up. Typically the peak in the curve occurs at a very short maturity (less than a year, perhaps less than a month) and the entire curve slopes downward from there out to the long maturities. This type of inversion usually ushers in a recession and is a most unwelcome event in the financial markets; the proverbial sneaker in the punch bowl. As has been the case in recent years, we live in interesting times. The current inversion contains elements of both types of inversions. While clearly the Fed has not yet tightened enough to set up a classic inversion of the type that strangles the economy, they are on that path. At the same time the Treasury is reducing the supply of long bonds thus reinforcing a bid for bonds at the long end of the curve. (If the current economic environment persists, ultimately most Treasury debt will be retired.) So we have this mix-and-match type of yield curve inversion, some tightening and some supply constraint. While this is not a horrid situation, it is not a great one either. As with so many other things--financial and otherwise--we find ourselves on the cusp. The yield curve has become simply another source of uncertainty in an already uncertain world.