The Really Useful Gold Thread

US govt bonds - Yield curve inverts for first time in five years - UPDATE 6
NEW YORK (AFX) - Treasurys were lower Tuesday after the spread between the
2-year note and the 10-year note inverted for the first time in five years.
An inverted yield curve occurs when short-term maturities pay a higher
interest rate than longer-term maturities.
Such an event has typically foreshadowed a noticeable downturn in the
economy and, usually, a recession. With an inverted yield curve, banks can no
longer make money by borrowing short-term money and lending it at longer terms.
The inversion first came in European trade when the 2-year note yielded
4.411% versus a 10-year yield of 4.405%. The curve briefly inverted in late
morning trades, with the 2-year note yielding 4.377% and the 10-year yielding
4.373%.
In recent trades, the yield curve normalized with the 2-year yielding
4.368%, while the 10-year yield stood at 4.376%. Still, a large part of the
yield curve was still inverted, with 5-year notes yielding 4.327%, just 8 basis
points more than the overnight federal funds rate of 4.25%.
"The market has been pressing for curve inversion for several weeks," said
economists at Action Economics, who said they expected it would be a temporary
development.
The last time the yield curve inverted was in 2000, before the last U.S.
recession and a period of aggressive rate cuts by the Federal Reserve. The yield
curve briefly inverted in 1998 during the Asian financial crisis, the only time
in the past 30 years that an inverted yield curve has not preceded a recession.
Some economists continue to eye the yield curve as a critical economic
indicator. Others say it's lost its usefulness because special factors, such as
the government shifting issuance to shorter maturities, have distorted the
curve's economic signals.
The Fed too has played down the bearish implications of inversion, although
"many in the market are much less prone to shrug it off," said Action Economics.
Still, "the backdrop of robust growth and benign inflation suggests that the
market is not signaling a slowdown in growth which has been the case in prior
curve inversions," Action said.
With no economic data on tap Tuesday, the market focused on Treasury's
announcement that it would auction $20 billion of 2-year notes and $10 billion
in 4-week bills later this week. The proceeds from the two auctions will be used
to pay down about $16 billion in debt.
Elsewhere across the yield curve, the 5-year note was yielding 4.33% and the
30-year was yielding 4.54%.

This story was supplied by MarketWatch. For further information see
www.marketwatch.com.