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Sunday, July 23, 2006 8:12:38 PM
Charts on the Yield Curve - In Various Time Frames going back Three Years:
Charts on the the 30 Year T Bond Yield vs the 3 Month Treasury Note Yield - Note how uncommon it is to have the short term notes rising while the long term bond falls but until the short term yield is higher than the long term yield the yield curve is not inverted.
Yield Curve: The yield on the 30-year treasury bond minus the yield on the three-month T-Bills. When the yield curve spread is greater than 3.5% (very steeply upward sloping) it is bullish for stocks, and when the yield curve is negative (inverted) it is a bearish indication for stocks.
Formula: (Long Bond yield) - (T-Bill yield)
Gauge Elements: Magnitude
Updated: Weekly (as of Friday close)
Strategy
The yield curve will always be a factor in the future direction of the stock market, but it is most useful as an indicator when it becomes either very positive or inverted. Historically, an inverted yield curve has been followed by a recession and falling stock prices. A steep upwardly sloping yield curve with a spread of greater than 3.5% usually supports higher stock prices.
YIELD Curve A plot of treasury YIELDs across the various maturities at a specific point in time. At the front (left) of the YIELD curve are T-Bills with maturities of 12, 26 and 52 weeks. In the middle are Treasury Notes with maturities of 2, 5 and 10 years. At the end (right) of the YIELD curve are Treasury Bonds with maturities of 20 and 30 years. In a normal YIELD curve, YIELDs rise as the maturities increase. If the YIELD on shorter maturities is higher than that of longer maturities, then an inverted YIELD curve exists. An inverted YIELD curve is a sign of tight money and is bearish for stocks.
How direct is the effect of bond movements on the market? Does the market move lower when bonds move higher and visa versa? Judge for yourself:
Charts on the the 30 Year T Bond Yield vs the 3 Month Treasury Note Yield - Note how uncommon it is to have the short term notes rising while the long term bond falls but until the short term yield is higher than the long term yield the yield curve is not inverted.
Yield Curve: The yield on the 30-year treasury bond minus the yield on the three-month T-Bills. When the yield curve spread is greater than 3.5% (very steeply upward sloping) it is bullish for stocks, and when the yield curve is negative (inverted) it is a bearish indication for stocks.
Formula: (Long Bond yield) - (T-Bill yield)
Gauge Elements: Magnitude
Updated: Weekly (as of Friday close)
Strategy
The yield curve will always be a factor in the future direction of the stock market, but it is most useful as an indicator when it becomes either very positive or inverted. Historically, an inverted yield curve has been followed by a recession and falling stock prices. A steep upwardly sloping yield curve with a spread of greater than 3.5% usually supports higher stock prices.
YIELD Curve A plot of treasury YIELDs across the various maturities at a specific point in time. At the front (left) of the YIELD curve are T-Bills with maturities of 12, 26 and 52 weeks. In the middle are Treasury Notes with maturities of 2, 5 and 10 years. At the end (right) of the YIELD curve are Treasury Bonds with maturities of 20 and 30 years. In a normal YIELD curve, YIELDs rise as the maturities increase. If the YIELD on shorter maturities is higher than that of longer maturities, then an inverted YIELD curve exists. An inverted YIELD curve is a sign of tight money and is bearish for stocks.
How direct is the effect of bond movements on the market? Does the market move lower when bonds move higher and visa versa? Judge for yourself:
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