Economic turbulence ahead for 2006?

Normally in the fixed income market, there is a direct relationship between the length of an asset’s term to maturity and the yield from that asset. For example, the yield on a 30-year bond should be higher than that on a 10-year bond, and that on a 10-year bond should be higher than that on a two-year note, and so on and so fourth. Any deviation from this is results in an inverted yield curve.

 

An inverted yield curve is an MBA student’s worst nightmare because historically it has been a reliable indicator of bad economic times ahead. This happened in November for the first time since 2000 and happened again earlier this week. Only twice in the past 50 years has the inverted yield curve not been followed by a downturn in the economy. The most recent occurrence was in 1998 when there was a financial crisis in Russia and Long-Term Capital Management had just gone out of business. Investors in droves moved their money into bonds, thus raising bond prices and lowering bond yields.

 

I have heard stories from alums that graduated from Kenan-Flagler a few years back about how bleak the job market was when they graduated. I personally hope any downturn in the economy won’t happen until at least the fall when by then, I have hopefully secured my full time post graduation job offer.