Sunday, September 28, 2008

Inverted Yield Curve

betcha haven't heard that phrase in a while.

history has conditioned us to believe that the yield curve goes inverted at the top of business cycles and then reaches extreme 'normalisation' toward the trough. but in this era of Conflation, things tend to turn out a little differently than we expect.

here's the 10 year yield divided by the 2 year:

with all the duress this year, why hasn't the ratio hit a new high yet? entirely possible that a new high is coming. but the ultimate contrarian play this year would be to bet on a narrowing of the yield curve. someday all interest rates will be practically the same (and pretty close to 0%). or so I fancy.

wait. that means that betting on the 30 year offers the biggest gains now. chart of the 30/2 ratio:

the safe thing to do would be to wait for that triangle to break. or maybe put together an options volatility strategy to profit from whichever way it ends up moving. if you need some help with that, feel free to contact me, I'd be happy to assist.

(disclaimer: betting on a narrowing yield curve right now is probably the closest thing to a crap shoot I've ever suggested on this blog.)

Update 12:24 AM: chart of the 30/5 year yield ratio: