2 posts tagged “yield curve”

Professor DeLong encouraged us to add interesting things to the blog, so in that spirit, Econbroswer has posted a follow-up to the post we read last month on possible explanations of the inverted yield curve:

http://www.econbrowser.com/archives/2006/12/the_yield_curve_3.html.

They suggest that large foreign holding of US bonds may be holding down the term premium and therefore making the yield spread negative.  This effect, according to a recent econometric study cited on the post, may be causing up to a one percentage point decrease in the 10-year note's nominal yield.

The blog's recent topics also include China and the strength of the dollar, for anyone looking to read more about other topics we've been studying.

-Jeff Naecker

The yield curve and the current bond market conundrum: background readings:

Most recent Federal Reserve Press Release (October 25, 2006): <http://www.federalreserve.gov/boarddocs/press/monetary/2006/20061025/>: The Federal Open Market Committee decided today to keep its target for the federal funds rate at 5-1/4 percent...

SmartMoney.com's Living Yield Curve is excellent: <http://www.smartmoney.com/onebond/index.cfm?story=yieldcurve&nav=dropTab>: PEOPLE TALK ABOUT interest rates going up and going down as if all rates moved together. The rates on bonds of different maturities behave quite independently of each other, with short-term rates and long-term rates often moving in opposite directions.... The yield curve is what economists use to capture the overall movement of interest rates.... Plot today's yields for various maturities of U.S. Treasury bills and bonds on a graph and you've got today's curve... the line begins on the left with the shortest maturity -- three-month T-bills -- and ends on the right with the longest -- 30-year Treasury Bonds.

Jim Hamilton of UCSD is a little less worried about the "inverted yield curve" than he used to be: <http://www.econbrowser.com/archives/2006/11/the_yield_curve_2.html>: To the extent that the decline in the yield spread does represent a fall in the term premium, and if indeed a fall in the term premium itself does not signal an economic slowdown, it means that the current negative yield spread does not have quite as bearish a connotation as the historical correlation between the yield spread and output might otherwise suggest.... [R]ecent week-to-week moves in the yield spread... have been dominated by news about the real economic outlook, with prospects for slower economic growth translating into lower expectations for future short rates and a lower yield spread. Insofar as that's the case, the recent pitch into negative territory must still be regarded as worrisome. But just how worrisome? Slower than normal growth still looks to me like a safe bet. On the other hand, the negative growth characteristic of a recession is a little less likely than I regarded it before studying the latest research...

Treasurys rally after tame PPI, retail sales - MarketWatch: <http://www.marketwatch.com/News/Story/Story.aspx?column=bond+report&siteid=mktw&dist=10markets>: The benchmark 10-year Treasury bond was up 13/32 at 100-16/32, while its yield sank to 4.5620%.... The 2-year note was up 3/32 at 100 9/32, yielding 4.718%, keeping the yield curve inverted. The 30-year bond gained 24/32 to 97-14/32, yielding 4.653%, an 8-month low...