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Strategies & Market Trends : John Pitera's Market Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: Chip McVickar who wrote (7291)	1/5/2006 11:45:26 PM
From: Stoctrash	Read Replies (1) \| Respond to of 33421

Happy New Year everyone! ...time to make the doughnuts... frontlinethoughts.com The Yield Curve December 30, 2005 By John Mauldin The Yield Curve, Part 8 The Most Accurate Predictor of Recessions Estimated Recession Probabilities The 10 Year - 30 Year Connection Some Conclusions 2006 Forecast, London and Happy New Year! The level of attention to the recent and mild inversion of the yield curve has bordered on hysteria in the media. Does it portend a recession? Or is, as Ethan Harris, the chief economist of Lehman Brothers suggests, the bond market simply on drugs? This week we pause in our series on trade deficits to look at the real meaning of the yield curve and what it does and, just as importantly, what it does not mean. I give you a basic primer on the yield curve, as well as links to more information than you ever wanted so you can read morefor yourself. But first, thanks to all those who purchased a copy of Just One Thing this year. My editor tells me sales are doing very well, and another publisher has picked up the Chinese and Korean language rights. Thanks to a lot of word of mouth, like this note from Paul Howard: "Just One Thing is a fantastic book! Thank you for putting it together. I read 100 pages of it Christmas Day - which is no small feat with my two-month old triplet girls at home! With seven kids of your own, I'm sure you did your fair share of multi-tasking. I look forward to finishing the book soon. Thanks again for getting such a great investing book out in the marketplace." And H.V. Kaelbar writes: "I think John Mauldin has done it again! I'm a regular reader of his newsletters and am happy when I get to read his work in book form. He also makes the rounds with some of the most brilliant minds in the industry today and shares his knowledge ((snip)) The 10 Year - 30 Year Connection The Treasury plans to start issuing new 30 year bonds in February. This will be of interest as there is an interesting relationship I have noted back in 2000 between the ten year and the 30 year bond. "Just for kicks, I went to the Federal Reserve web site (http://www.federalreserve.gov/Releases/H15/data.htm) and downloaded the interest rates on 10 year and 30 year bonds since 1977. Then I did a comparison. Curiously, it is not at all uncommon for the 10 year rate to go above the 30 year rate. "In fact, it seems to happen about 18 months or so before a recession or a stock market crash. Not just one time but every time the 10 year/30 year rates became inverted since 1980 we had either a recession (in 1980, 1982 and 1990) or the '87 stock market crash. "I should point out that in 1987 we did not see an overall negative yield curve while we did prior to the recession years." For the record, Bloomberg says the 30 year is at 4.54%. Since there are no actual 30 year bonds (the longest note would be about 25 years), I assume they have some method for giving us this number. No matter, in a few months we will have a real number. And we can then compare it to the ten year. If for some reason that 30 year drops below the ten, you can bet many economists will argue that it is a result of the Fed not offering enough 30 year bonds so that demand drove the rates down. I should point out they made very similar arguments in 2000. Of course, when things went back to normal in late 2000, those arguments began to ring hollow. They will this next time as well