An inverted yield curve bonanza

28Dec05

We hope all of our readers had a pleasant holiday and a Happy New Year.

Mark Whitehouse in the Wall Street Journal covers the implications of an inverted yield curve. There seems to be a significant division as to the effect of an inverted yield curve. The inversion is to date not particularly severe, but is a warning sign. A certain class of investors will surely be affected:

Inversions can squeeze or even eliminate profit margins for banks, hedge funds and any other financial business that borrows money at short-term rates and lends it at long-term rates. “This is a warning signal…that we are on recession watch now,” says Paul Kasriel, chief economist at Northern Trust Co. in Chicago. The inversion, however, so far is minor, he says. And some economists believe an inversion isn’t as reliable a predictor as it once was.

There is a great deal of commentary in the blogosphere on the yield curve inversion. A sampling follows.

Barry Ritholtz at the Big Picture has a good explanation for what the inverted yield curve means for the economy and the markets.

ContraHour weighs in on the inverted yield curve debate and finds some reasons why the “…the yield curve may be more relevant today than it was over the past 20 years.”

The Capital Spectator recognizes that the yield curve inversion comes amidst an entire list of risk factors that investors need to sort through.

Economist’s View does not find much to worry about a yield curve inversion, given that inflation is relatively muted.

Paul Kedrosky at Infectious Greed finds the entire furor a tempest in a teapot.

In other words, turning a one-day yield-curve inversion into front-page news may be entertaining, but it should, at the very least, be footnoted, “There is an excellent chance this is meaningless.”

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