by Leonard Konis

Created on: December 14, 2006   Last Updated: April 13, 2007

Predicting a recession or economic slow down in the United States economy, is not always an easy forecast by many economist or Wall Street experts. Also, trying to anticipate a change in the business cycle. However, during the past century an inverted yield curve or "negative yield curve," has predicted US recessions or weakening economy, by the bond market, six out of eight times. An inverted yield curve occurs, when US Government long - term debt instruments (Example: 30 year US Bond) or bonds yield less than short - term debt instruments

(Example: 10 year US Bond), and have the same credit quality rating. Normally, investors expect to receive more interest for long term bonds than short - term securities. The inverse yield, between long and short - term bonds, happens very rarely and considered to be a predictor (not always) of an economic recession or entering a period of slow economic growth, a year later or sooner.

During the past year, and beginning of 2006, Federal Reserve Bank has been tightening liquidity or increasing interest rates. Their monetary concerns, preventing inflation or economic speculative growth. Also, by raising interest rates, this stabilizes the value of the United States Dollar, trading against other currencies. This creates a favorable environment for foreign investors to purchase hard assets, including real estate in the United States, and US securities. Besides, a strong US Dollar currency will help maintain low import prices. Certainly, the value of the US Dollar against other currencies can change detrimentally, when the US economy shows signs of a slow down. Unfortunately, history has shown, the Federal Reserve Bank often over extends their economic policy, either by raising or lowering interest rates to far (In 2003, the Federal Reserve Bank had lowered the Federal Funds Rate down to one percent). The effects of monetary policy, has rippling effects in the future, either by to much stimulus and growth or leading the economy, into a slow down or possible a recession. Many times, Economists or bond market participants anticipate, the US economy may slow down, by an approaching inverted yield curve. The longer an inverted yield curve remains or the wider yield between short term and long term bonds, is an ominous predictor for a future recession or low economic growth. Often, this reflects a down slope in the business cycle.

Evidence indicates an inverted yield curve leads to a possible recession. In 1996, Federal Reserve Bank

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