One of Wall Street's most ominous — and accurate — recession indicators has been flashing red for so long that some say it has lost its relevance.
The inverted yield curve — which occurs when the yields on long-term Treasuries fall below short-term yields — is a time-honored recession signal. Normally, long-term yields should exceed short-term ones.
Yields on the 10-year Treasury note, often used as a benchmark for 30-year fixed-rate mortgages, have fallen below yields on six-month Treasury bills for eight-straight months with no recession, the longest such period since 1981, says Joseph Kalish of Ned Davis Research. The curve has been inverted 11 of the past 13 months.
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Stock traders have been betting that the Fed would start lowering rates as the economy slows, making the yield curve less inverted. Most economists now think the Fed won't cut rates until late this year, if at all. But that's better than the other way the curve could return to normal: a jump in long-term bond rates.
http://www.usatoday.com/money/economy/2007-02-13-curve-usat_x.htm?csp=N009