US bond market worries about recession

Comments made by outgoing Federal Reserve chairman Alan Greenspan at a conference in Wyoming on Friday sent prices down and yields up on US Treasury bonds.

Mr. Greenspan, in discussing the values currently assigned to real property, made remarks that could be construed as indicating that the Fed will follow a policy of continuing to increase interest rates in order to control prices in the housing market.

As a result, yields on the 2-year Treasury bond were up by nearly 6 basis points to 4.06 percent on Friday afternoon, while 10-year bonds gained 2 basis points to yield 4.18 percent.

The difference in yields between 2-year and 10-year US Treasury bonds is at its lowest in over four years, at only 12 basis points on Thursday in New York.

Last year at this time the difference sat at 180 basis points.

This circumstances has come about because yields have not followed tradition and risen along with hikes in short-term interest rates that have been initiated by the Federal Reserve over the past fourteen months.

With yields on the two bonds so close, analysts are watching for an inversion, a circumstance where 2-year yields go higher than 10-year yields.

The importance of this is that six of the seven times this has happened since the 1960s, the inversion has been followed by a recession.

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