An inverted yield curve
often causes a lot of concern, but it need not be a harbinger of doom.
"Overall, we are a bit more dovish going into the new year but increasingly tight spreads and inverted yield curves
are forcing us to maintain our low duration and high yield strategy.
"Although an inverted yield curve
is a good indicator of trouble, it has never been a good sign of immediate trouble," said Brad McMillan, chief investment officer at Commonwealth Financial Network.
That's why an inverted yield curve has come to be a pretty reliable indicator of an imminent end to a cyclical expansion.
Investors and business people are conditioned to know what an inverted yield curve means, and a natural cautiousness creeps into their decision-making: They become less likely to invest aggressively or hire employees.
Inverted yield curves historically have been harbingers of recessionary times ahead.
Inverted yield curves effectively create a shortage of capital because many lending institutions, which borrow their money at the rate determined by the Federal Reserve and then lend it out at long-term rates can't generate enough of a spread on which to profit.
Both countries also have inverted yield curves
. Only New Zealand appears to require high levels of interest rates to restrain its property boom.
Yield-curve inversions are thought to be a very good predictors of recessions: an inverted yield curve has led all recessions since 1969-1970.
2 The inverted yield curve: a song of policy tightening and recessions
An inverted yield curve has been a feature of the data throughout the summer and fall months of 2006.
Since that point in time, the yield on 10-year Treasury notes has fallen nearly 70 basis points, resulting in the strongly inverted yield curve we observe today.