Bond Yield Curve

One the most important charts to watch this year will be the U.S. yield curve. When the yield curve goes inverted it is almost a guarantee that a recession will follow soon after. The last time the yield curve went inverted was mid 2006. We saw the first signs of the GFC by mid 2007. We could well see the yield curve go inverted this year. This would be right in line with the long term demographic cycle and quite a few other long cycles. We should at least see a significant correction. As I say, I don’t make long term forecasts but we know what the warning signs are when we see them. Some people say since the global governments have intervened in the markets, that the long cycles are no longer relevant. It will be very interesting to see what happens over the next couple of years. Some experts are saying that inflation could move sharply higher causing the Fed to raise rates aggressively.

TNX 10 yr yield mth going back to 1995 shows the bull market in 10yr treasuries has been intact for the whole of that period. We are right on the key trend line now as the new Fed chair is set to take office. It is going to be one of the most interesting years in a long time. So many bond guru’s have called the end of the bond bull only to be proven wrong. Different this time?

Dynamic yield curve (source: stock charts). The key thing to watch is the red yield curve line on the left. When the left hand side is higher that the right, it means that short term rates are higher than long term rates and therefore the yield curve is inverted.

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