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Following the Steep Yield Curve Could Lead You Off a Cliff

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After a deflationary credit bust, credit conditions, debt levels, and attitudes are far more important.

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Curve Watchers Anonymous is once again looking at the yield curve for economic clues. Here are a few charts to consider:

Yield Curve Timeline from 2000-2010


Click to enlarge

Source: eSignal

Green: $TYX -- 30-Year Treasuries
Orange: $TNX -- 10-Year Treasuries
Blue: $FVX -- 5-Year Treasuries
Brown: $IRX -- 3-Month Treasuries

Area 1: Inverted yield curve signals pending dotcom bubble burst
Area 2: Fed reflates holding interest rates at 1% for 18 months fueling mother of all credit/housing bubbles
Area 3: Yield curve tight for two full years, inverted on and off for 18 months. This was the mother of all warning signals. Few paid attention. Ben Bernanke said "No recession coming. No housing bubble to bust"
Area 4: Fed reflates, cutting rates to zero.

Interest Rate Spread 1977-2010



Click to enlarge

Source: Jay Matthews at Velocity Capital

Interest Rate Spread 1977-2010 Percentage Basis



Click to enlarge

Source: Jay Matthews at Velocity Capital

Interest Rate Spread 1977-2010 Percentage Basis Detail


Click to enlarge

Source: Jay Matthews at Velocity Capital

Credit Not Expanding


Under normal circumstances with a steep yield curve, banks would be willing to borrow from the Fed at close to zero and lend at prime or higher.
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