Unexpectedly Intriguing!
August 9, 2006

Since the Fed opted to keep (HT: William Polley) the Federal Funds Rate at 5.25%, and that the spread between the yields of the 3-Month (4.93%) and 10-Year (4.92%) U.S. Treasuries is flat at -0.01% as of market close yesterday, the current odds of a recession occurring in the U.S. sometime in the next 12 months is 37%. Or to be more precise, 37.3%.

Visualizing this data gives us the following picture:

For the odds of recession to reach the 50% threshold, the yield curve for U.S. Treasuries would need to invert by 0.44% for the current 5.25% Federal Funds Rate. In other words, for yesterday's 3-Month Treasury yield of 4.93%, the yield of the 10-Year Treasury would have to be 4.49% or less for the probability of recession beginning in the next 12 months to rise above a 1 in 2 chance of happening.

Question of the Day: For that kind of yield curve inversion to happen, what does that say about the bond market's expectations for inflation?

Update: Barry Ritholtz parses the Fed's statement!

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