Trading the Yield Curve
The mild Yield Curve Inversion in 2006 generated a lot of talk in the press recently regarding its uncanny ability to forecast recessions. A long term look at the Yield Curve between the 3 month and 30 year rates reveals much more about this dynamic pulse on the money supply and economy. The Yield Curve is directly affected by the Fed as it sets the short term rate, but the long term rate is set by market forces and perceptions regarding the growth prospects for the economy and inflation which affect return on investment.

Do not fight the Fed?
While this common saying is based on fact, it is best to "wait" until the Fed ends the easing cycle before buying. It also is more profitable to do so when the easing was quick and significant and has taken us near the descending 20 year support line. Inversely it is best to sell when the Fed has risen rates quickly and significantly to the inversion line near 1.0 and/or the rising or descending 20 year resistance lines. The rise in long-term rates in early 2007 turned the Yield Curve down to give a sell signal and any Fed rate decrease at this point would fruther confirm the economic weakness ahead.

Charts courtesy of StockCharts.com

Charts courtesy of StockCharts.com

Charts courtesy of StockCharts.com




Charts courtesy of StockCharts.com