Higher short-term interest rates – CAUTION
Full article : http://biz.yahoo.com/ap/051227/wall_street.html?.v=20
The yield curve, the spread between the yields of short-term and long-term bonds, inverted for the first time in five years. That means short-term interest rates were higher than long-term interest rates. Investors have been watching the yield curve closely because, in the past, inverted yield curves have preceded recessions.
“We’ve never seen a recession without the yield curve inverting, but the corollary is not true: Just because the yield curve inverts does not mean we’re going to have a recession”
Normally, lenders receive higher interest when they commit their money for a longer time. A surge in demand for short-term credit can flatten or invert the yield curve.
The last time the yield curve was inverted was 2000, Charles H. Blood Jr., senior financial markets analyst at Brown Brothers Harriman & Co. At the time, “it served its classic function of a warning,” he said.
Investors have been watching for months as bonds’ long-term yields and short-term yields grew closer. “Although an inverted yield curve does not always imply an economic recession, it has predicted a profit recession 100 percent of the time,” Merrill Lynch’s North American Economist David R. Rosenberg said earlier this month.
