The Real Yield Curve

J.D. Swampfox's picture

Rosenberg argues the nominal yield curve would be
inverted right now if it were not for the fact that short term rates are
essentially at  zero.  The Treasury shows the Friday July, 9 nominal yield
curve as:

Date 1 mo 3 mo 6 mo 1 yr 2 yr 3 yr 5 yr 7 yr 10 yr 20 yr 30 yr
07/09/10 0.16 0.16 0.20 0.30 0.63 1.03 1.85 2.52 3.07 3.85 4.04

 

If we assume that expected inflation for the short term is (say) -3,
that is, that deflation is expected over the short term, but that inflation is expected to rear its ugly head over the long term (say)
+ 3, then we can use Fisher's relation that nominal rates less expected
inflation equals real rates, to see that the REAL yield curve could be
inverted right now:

2 year Short term nominal (.63) - expected deflation (-3.00) = 3.63
real

30 year Long term nominal (4.04) - inflation (+3.00) = 1.04 real

If the real yield curve is inverted, it's an ominous sign...

View the original article at:
http://www.swampreport.com/economy/the-real-yield-curve/