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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: CalculatedRisk who wrote (41913)	11/29/2005 11:12:31 AM
From: mishedlo	Read Replies (1) \| Respond to of 116555

Do GSEs help make housing affordable? globaleconomicanalysis.blogspot.com Mish

To: CalculatedRisk who wrote (41913)	11/29/2005 11:29:06 AM
From: mishedlo	Respond to of 116555

Spectre of yield curve inversion By Jennifer Hughes in New York Published: November 28 2005 18:39 \| Last updated: November 28 2005 18:39 US TreasuriesThe Treasury yield curve partially inverted on Monday, sparking chatter that it could be the harbinger of a full inversion – a rare event that often precedes a recession. The curve is a line plotted from the yields of Treasury borrowings from the shortest term to the longest. It should slope upwards, since lending for longer periods is riskier and needs higher compensation in the form of higher yields. On Monday, yields on three- and five-year notes traded at lower levels than those on two-year notes, implying it would cost less to borrow for five years than for two. In late August, three-year paper briefly traded at lower yields than two-year notes, but the curve then steepened and resumed its normal shape. Monday was the first time five-year notes had been involved since the curve last inverted ahead of the 2001 recession. The spread, or difference, between two-year and 10-year yields has narrowed to its own four-year low at just 0.07 of a percentage point. An inversion involving 10-year yields would be considered extremely significant because many other lending rates are priced off 10-year Treasuries and lenders tend to fund their longer-term loans by borrowing short-term. By late morning in New York, five-year notes yielded 4.330 per cent, down 0.5 basis points, while two-year yields rose 1,3bp to 4.337 per cent. Ten-year yields fell 2.7bp to 4.408 per cent amid talk of renewed interest in specific curve-flattening trades. These have been popular with investors seeking to capitalise on the flattening by short-selling shorter-dated paper (where prices are falling as yields rise) and buying longer-dated notes to capitalise on the price gains as yields fall. Traders said the partial inversion plus the narrowness of the spread between two- and 10-year yields could trigger interest from momentum traders aiming to push the spread to zero The wider reasons behind the curve flattening have been attributed to expectations that the Federal Reserve will continue raising interest rates, perhaps reaching levels that could begin to restrict the economy, triggering at least a downturn, if not a recession, and leading to interest rate cuts. The forward curve – a series based on eurodollar interest rate futures – has already inverted in 2006, implying rate cuts are priced in to follow quickly after the Fed stops raising rates. news.ft.com Mish