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Yields below fed funds may signal Fed overshoot
Cat : Euro/ Dollar
Date : 2006-07-13 11:58:43                      Reader : 484
 to other secured countries . Also the dollar suffering inflation of not less than 17% , and US doudget of half trillion dollars per year, together with more than nine trillion dollar as foreign debt, all oblige transfer from dollar to other currencies.


REUTERS 13/7/2006

Yields below fed funds may signal Fed overshoot


By John Parry and Lucia Mutikani - Analysis

NEW YORK (Reuters) - A U.S. Treasury market rally that has driven bond yields below the key inter-bank overnight lending rate may be the strongest signal yet from the bond market that the Federal Reserve has gone too far in its campaign to raise interest rates.

Bond market rallies that leave long-term bond yields below short term interest rates, resulting in an inversion of the normal yield curve, have often preceded economic downturns historically.

But only four other times in the last quarter century has the majority of the U.S. Treasury yield curve, from 2-year notes to 30-year bonds, slipped below the federal funds rate, the main U.S. interbank overnight lending rate.

Each instance "preceded either a downturn in the economy, a major financial strain, or both," wrote Merrill Lynch’s North American economist David Rosenberg in a research report on Monday.

Previous occasions included the late summer of 1998, when Russia defaulted on its debt and hedge fund Long Term Capital Management failed, and another example occurred in March of 2000 when technology stocks peaked before the 1990’s stockmarket boom ended.

On past occasions "what transpired on average over the next six months was a major rally in the bond market, led by the shorter end of the yield curve, a 25 basis point widening in corporate bond spreads, a 6 percent decline in commodity prices," and a sharp underperformance of small cap stocks, Rosenberg wrote.

Last week, the U.S. 30-year bond’s yield joined other maturities of Treasury notes and bonds in falling below the federal funds target rate.

Economists also note indications of a potential economic slowdown from the stock market, where share prices have been trending lower since early May.

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