This thing is what is known as the Treasury Bill Yield Curve. It shows the bond yields for the various bonds (5 year, 10 year etc.). This chart shows yesterday's and today's numbers. Economists pay attention to this thing. They claim that if the curve flattens or worse inverts, then that always signals a recession (this rule has never failed). The last time the yield was inverted was from July through November 2000, right about when the last recession began. John Herrman Economic Director of Cantor Fitzgerald, the US's largest bond broker believes that there is no "reason to prevent this thing from inverting" and that an inversion could come by next quarter.
Alan Greenspan signaled today that the Fed is going to keep raising the Fed Funds Rate quarter point at a time at least until the end of the year, culminating in a 4% rate. What this means is that the short term yields are going to keep going up. Long term yields will probably keep going down since other country's bonds have lower yields, making our 10 year bonds attractive. This means we will have a flat to inverted yield curve. Chairman Greenspan tells us not to worry however since a flat yield curve is not a sure sign of an economic slowdown.
This all sounds a little like hocus-pocus until you look at why a flattened or inverted yield curve causes trouble. I'll let Tom Dyson explain it from today's Rude Awakening article, Murphy's Trade:
[When an inversion happens] there's no incentive for banks to make loans and they pull money out of the system. Liquidity dries up.
Debt still needs to be serviced. The country will be screaming out for cash to pay its debts like a junkie screams for more drugs as he's being strapped to his bed. Anyone with debt feels the pain, and in America, that's most people.
A self-fulfilling circle will have been put in motion. Higher bond prices will choke the economy of even more liquidity as the curve inverts further. Consumerism will grind to a halt. The U.S. economy will hit a wall. Assets that went up will come down fast. You'll get bankruptcies, profit warnings and unemployment...
A cash crunch ensues. People panic and rush into safe haven investments. Treasury bonds are still the most trusted instruments in the world; they will be popular and their prices will spike even higher. People will talk about a bubble in bonds.
