Sunday, March 9, 2008

Yield curve

While I was at the airport in the morning I went holiday, I visited a book store and came across a book titled The secrets of economics indicators by Bernard Baumohi. This book explains the meaning of all important and key indicators like consumer price index, producer price index, consumer confidence, new home sales, etc for the world’s biggest economy of the world. Understanding these indicators can be essential on how they can affect the market sentiment.

Results from the indicators have a variable range of impact on the stock market. As I was browsing, a topic on US yield curve caught my attention. According to the book, the yield curve has a very significant impact on the stock market. Furthermore it has accurately predicted all the previous recessions except for the year 2000 recession.

The topic on yield curve thus triggers me to know more about it. Basically the curve is a yield plot of US treasury bills across various maturities period at a point of time. The shape of the curve can dictate the state of economy as a whole.

During good economic growth, the curve is an upward sloping. It makes sense that the yield increases as the maturity becomes longer since most investors are putting money in equities or stocks when market is good. However when times are uncertain or economic outlook turns gloomy, many investors are putting their money in safe havens like treasury bills. As quoted from stockcharts website, an inverted yield curve is a sign of tight money and bearish for stocks.

You can monitor the shape of the yield curve at any point of time here. So based on this indicator, are we seeing a recession coming? It certainly doesn’t look so isn’t it?

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