An Inversion Arrives

Last week's positive inflation report, coupled with what was perceived as relatively weak news on durable goods orders and home sales, had little impact on estimated market expectations for the outcome the Federal Open Market Committee's January meeting.  Another 25 basis points on the federal funds rate remains the runaway favorite among those trading in options on federal funds futures.

 

Expectations for the March meeting, however, softened by just over 10 percentage points:

 

 

That notwithstanding, even a halt at 4-1/2 may not be enough to keep short-term interest rates above long-term rates.  From CNNMoney: 

The yield on the benchmark 10-year Treasury fell below that of two-year notes early Tuesday, inverting the yield curve for the first time since December 2000.

At 6:23 am ET. the 10-year note yielded 4.393 percent while the two-year note yielded 4.396 percent.

At least some influential people think we shouldn't be overly concerned:

Fed Chairman Alan Greenspan has said the yield curve has lost its ability to signal pending changes in economic conditions because markets have become more complex.

Others, of course, are less sanguine.

UPDATE: Edward Hugh sees some changing fundamentals behind the flattening of the yield curve. But Barry Ritholtz thinks too flat is still "worrisome". The Skeptical Speculator says investors are "concerned."  Ben Jones notes that some think this could be trouble for the new Fed Chairman. And you can watch a video of some talking heads talking, from the Wall Street Journal Online (at least for awhile).

UPDATE II: Mark Thoma is "not worried.

UPDATE III: Dr. John Rutledge believes "This is not the end of the world. It is, however, a time to be thoughtful about the economy and the markets."

UPDATE IV: Jim Hamilton has more to say (and more blogs to which to link).

Comments

[nate]

Greenspan probably does not currently own a business and a bunch of inventory.

[jeff]

Greenspan doesn't always listen to the beat of the market. Irrational exuberance aside, when the yield curve inverts, there is something at play. If it is a recession, which could happen because peopel expect it to happen if there is an inverted yield curve, then it is what it is. There may be other things at work, carry trades, foriegn buying, and credit derivative manipulation in underlying markets that are causing it. I know that for sure, many traders are caught "long" spreads and are getting beat up buy it. Momentum of them getting out of bad trades may carry this thing a little further.

[TCO]

Jeff, you left out the Zurich gnomes, you fluffheaded non-efficient market conspiracy theorist fluffhead.

[Credit Derivative]

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http://www.axiomglobal.com

http://cdsaxiom.com

[Charlie Mann]

Do you have any other articles or info on credit derivatives pricing or trading? Been looking to find out more info on the player in the market... I've some interesting information on the following sites:
http://www.cdscawley.com
http://cdsaxiom.com

Know where I can find any additional info on the other players?