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The day when we see an inverted yield curve in the US “is getting closer”, says Edward Chancellor on Breaking views.com.
Following the latest hike by the Fed (putting base rates up to 4.25%), short-term interest rates are a mere 0.25% less than those on ten-year Treasury bonds. And as rates are expected to rise again in January – “provided long-term rates don’t blow out in the meantime” – short-term rates should be higher than long-term rates (ie, the curve will have inverted) by early next year. This is scary stuff, given that an inverted yield curve usually signals bad news, says The New York Times: the last six recessions in the US have all been preceded by one (most recently, the curve inverted in 2000 just before the 2001 recession). Still, on the plus side an inverted yield curve doesn’t always mean disaster – there was no recession following the inversions of either 1965-1966, or 1998, for example.
Alan Greenspan for one doesn’t think that there will be one this time either, says The Wall Street Journal. Instead, he says that the low yields on long-term bonds are down to the heavy buying of US bonds by the big Asian economies, as well as by big institutions trying to match their asset holdings to their long-term liabilities (high levels of demand push prices up and yields down). Greenspan isn’t alone in his optimism, says The Daily Telegraph: according to Merrill Lynch, 93% of investors think a recession in the US next year is “unlikely” and 25% of them intend to up their exposure to US equities in 2006. But are the risks of recession really that low?
We aren’t convinced. The housing market in the US is slowing (inventories are up and the growth in sales of new homes is down), something that is bound to hit consumption, and inflation is not entirely controlled (even the Fed has said it remains a risk) and the long-term effects of this year’s energy shock can’t be ignored. Oil prices are still high, but worse, natural-gas prices have doubled in the wake of Hurricane Katrina. There is, says The Daily Telegraph, a “bitter North American winter to come” and high energy bills are going to come as a shock to consumers. This energy ‘tax’ might be the “joker in the pack” that really gets them cutting spending and so pushes the economy and the market into the red. Let’s not forget that “bear markets always come out of a clear blue sky”.
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Harry Stourton
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