NationStates Jolt Archive

... and professional economists, should any lurk around NS General.

Can someone please explain the ramifications of an inverted Treasury yield curve?

This morning the 30-year yield is 4.48%, the 10-year yield is 4.52%, the 2-year yield is 4.63%, and the 6-month T-bill yield is 4.67%.

It seems to me that this would completely undermine any incentive to offer long-term loans - and that can't be good for the American economy.



Article on MarketWatch:

http://www.marketwatch.com/News/Story/Story.aspx?guid=%7B15F9959D%2DAB4E%2D409D%2DBCCC%2DF58A87BF46C2%7D&siteid=mktw&dist=

It could be to encourage people to save money and limit their spending. There is a great concern that the Housing bubble might burst in the USA, causing a huge fall in the value of personal wealth, and thus spending.

It means you should buy defensive stocks.

And that there is probably going to be a recession.

It means you should buy defensive stocks.

And that there is probably going to be a recession.
Defensive stocks? What are those?

Or do you mean stocks in companies that sell to the Department of Defense?

It could be to encourage people to save money and limit their spending. There is a great concern that the Housing bubble might burst in the USA, causing a huge fall in the value of personal wealth, and thus spending. How does lower interest on a long-term bond encourage people to save?

Defensive stocks? What are those?

Or do you mean stocks in companies that sell to the Department of Defense?

Defensive stocks are where you put your money in times of recession, i.e. those not so badly effected by a slowdown in overall econmic activity. Something like healthcare, tobacco or consumer staples like food.

I think there is little meaning to it at this point. You have to remember that the price of Treasuries moves inverse to the yield; there is record demand for US bonds due to the size of our twin deficits and the rapid growth of the Chinese and other world economies, and one of the biggest buyers of Treasury bonds is the Chinese government. The relative weakness of the other developed economies has kept their bond yields low, which means money normally invested in other countries is coming in to the US.

The raising rate environment also drives demand by pushing up the yields for all treasury bonds, so that further flattens the curve.

If we look at the data, jobless claims are at 5-year lows, job growth is accelerating, real wages are rising again, consumer spending is holding strong, and there are rumors of a huge upside growth surprise in Q1 GDP following the 1.1% last quarter. Overall, I think the inversion is due to deficit and worldwide demand factors rather than real economic concerns.

Overall, I think the inversion is due to deficit and worldwide demand factors rather than real economic concerns.A deficit is not a real economic concern? It sure as hell was here in Canada. But our debt to GDP ratio was admittedly very high at one point.

How much interest does the US pay annually on its national debt?

Silly Financial Econ Majors. Pffft.

How does lower interest on a long-term bond encourage people to save?
Ah I didn't see that. What I meant was disincentives to loans would encourage them to save.

A deficit is not a real economic concern? It sure as hell was here in Canada. But our debt to GDP ratio was admittedly very high at one point.

The deficit at this point in time is manageable. Now, if we were to run this for another decade, the situation would be much different. However, even now the deficit runs the risk of stoking inflation, but not enough to derail economic growth at this point in time.

The trade deficit doesn't really mean very much and it's not financed by Treasuries like the national debt is. Actually, a trade deficit is great because it means US consumers are exchanging paper money that costs $0.04 to print for every $1.00 of physical goods.

How much interest does the US pay annually on its national debt?

$352,350,252,507.90 as of FY2005

That's 2 times as big as the entire yearly budget of Canada, and that's $300 billion in taxes totally wasted.

Defensive stocks are where you put your money in times of recession, i.e. those not so badly effected by a slowdown in overall econmic activity. Something like healthcare, tobacco or consumer staples like food.

Gold, Copper and Silver would be good choices too.

Gold, Copper and Silver would be good choices too.

Not really. Perhaps during inflation, but not during a recession. Prices for commodities fall as demand slows, especially for copper since it is used in so many durable goods, housing, and other recession-vulnerable sectors.