Listen to the Yield Curve

Tuesday, December 27, 2005
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Because it tells a story. Today, the yield curve inverted. Long-term maturities are now paying a lower interest rate than short-term maturities. In a quote from the USA Today article, the last sentence, er, stands out:

Other economists say the curve has lost its significance because special factors, such as the government shifting issuance to shorter maturities and strong demand for Treasurys from foreign buyers, have distorted the curve’s economic signals.

An inverted curve doesn’t cause economic weakness by itself, although it has been correlated with weakness in the past, said Bill Dudley, an economist for Goldman Sachs. He argued that tight monetary policy is the underlying cause of most slowdowns.

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