The bond market has a crystal ball that the equity market should take a look at: the yield curve. The events of this past year have once again proven the value of using the yield curve as a predictor of future economic and financial events. For investors that heeded the warnings inherent in the yield curve at the start of last year, they are now sitting on a pot of gold. For everyone else, well, they are looking at their stocks like a deer at headlights. | Prelude To A Bull The Economic Signs That Signal Market Bottoms Part I By Tony Crescenzi The bond market has a crystal ball that the equity market should take a look at the yield curve. The events of this past year have once again proven the value of using the yield curve as a predictor of future economic and financial events. For investors that heeded the warnings inherent in the yield curve at the start of last year they are now sitting on a pot of gold. For everyone else well they are looking at their stocks like a deer at headlights. A Yield Curve Primer Before I go on let me give you a little primer on the yield curve. For simplicity s sake assume that when I say yield curve that I am talking about the yield curve for . Treasuries. The yield curve is basically a chart that plots the yields on bonds carrying different maturities usually ranging from 3 months to 30 years. When bond investors analyze the yield curve to try to glean its meaning they look at the difference between yields on short-term securities compared to that of long-term securities. The spread between the 2-year note and 30-year bonds is commonly used. A normal yield curve is one in which long-term maturities have higher yields than short-term maturities. In such a case the yield curve is deemed to have a positive slope. The curve is considered inverted when longterm maturities have a lower yield than short-term ones. The shape of the yield curve can mean a variety of things to bond investors but there are two basic ways of looking at it. First if it is positively sloped this is usually an indication that the Federal Reserve s monetary policy stance is and will likely continue to be friendly toward the markets. That is why the yield on short-term maturities is lower longer maturities the Fed controls short-term interest rates . A friendly Fed is usually good news to stocks and to the economy. So a steepening yield curve generally forebodes good times for investors over a several quarter .
