Flattening Yield Curve Suggests Weakening US Equities,
Lower Interest Rates And A Slowing Economy In Q3/Q4 2010 

The following is an excerpt from our July 16th ASBBURY RESEARCH Commentary entitled, "Flattening Yield Curve Suggests Further Decline In Long Term US Interest Rates and Equity Prices As Economy Slows"

Throughout 2010 the FOMC and Chairman Bernanke have made it crystal clear that -- in the foreseeable future -- it would be unlikely that the Fed would change its current accommodative policy on interest rates .  Despite this, in late Q1 and early in Q2 of this year, a parade of analysts and commentators were not only stating in the financial media that US interest rates were surely headed higher, but that the Fed was already behind the curve on this.  Some even questioned Chairman Bernanke's competency and judgment.

They were all wrong.

Between April 5th and July 5th the yield of the benchmark 10-Year Treasury Note plummeted by 106 bps to 2.95% which suggests that it is probably better to listen to that no-nothing Mr. Bernanke than the media. 

Anyway, the point is that this 3-month collapse in interest rates also took the yield of the 2-Year Note down to 0.62%.  This is important to the message of our report because there are only two ways for the yield curve to flatten .  Either by:

1. the yield of the 10-Year Notedeclining faster than the yield of the 2-Year Note (known as a bull flattener , because the prices of both maturities would be rising in this scenario), or

2. the yield of the 2-Year Noterising faster than the yield of the 10-Year Note (known as a bear flattener , because the prices of both maturities would be declining in this scenario).

Now, with the Fed again stating in the June FOMC Minutes that the front end of the curve (which the Fed controls) is locked at essentially zero for the foreseeable future, and with the yield of the 2-Year limited in how much further it can decline before hitting zero, the only realistic way for the curve to flatten amid these conditions is via a bull flattener -- where the yield the 10-Year declines faster than that of the 2-Year.

This scenario suggests that the April advance in long dated US Treasury prices, which we correctly anticipated in our Apri 1st Commentary entitled, "US Interest Rates At A Key Decision Point", (access requires subscription) is  -- minor corrections aside -- likely to continue deeper into Q3 and potentially into Q4 2010.

Professional investors can request a sample copy of the entire report by sending an email to  info@asburyresearch.com and typing "Yield Curve Report" in the subject line and including your name and business contact info, or by phoning Asbury Research at 224-569-4112 .

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