John Mauldin: The Inverted Yield Curve

By | February 18, 2007

In his latest newsletter, John Mauldin is harking on several recent phenomena in the financial world. The one I am most interested in is the Inverted Yield Curve. It is a situation that he has commented on since December 20005 in his newsletter when he looked at the probability of a recession. In this newsletter, several quotes jump out about the likelihood a recession this year:

…the studies suggest we should see a recession as early as the late second quarter of this year, or more likely in the third quarter…

and

But a yield curve does not cause a recession. It simply tells us that something wicked this way comes. Something is out of kilter in the economy. Looking back at past recessions, it has been different things, so we can’t look to history with any sense of reliability to say, “This is it!”

Now, I’m not really an economist, but it is interesting to note that you can go into a bank and put your money on a CD or deposit. Take a look at the one year rates and two-year rates from E-trade right now. Look for yourself…

Period Interest APY
3 Month 4.88% 5.00%
6 Month 5.12% 5.25%
1 Year 5.26% 5.40%
2 Year 4.88% 5.00%
3 Year 4.88% 5.00%
5 Year 4.93% 5.05%

So something is going on. Could John be right? Well, I guess we’ll see. Right now, though, if you are opening a CD to create an income stream, the optimal rates seem to be at 1 year right now.

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