Yield Curve

A yield inversion effectively destroys the incentive for making longer-term loans. Historically, it has been viewed as a sign of lack of investor confidence in the nation's long-term economic prospects and a harbinger of recession.

But government officials, including Treasury Secretary John Snow and former Federal Reserve Chairman Alan Greenspan, have insisted that the inversion now reflects boisterous global appetite for U.S. assets, rather than deteriorating U.S. economic fundamentals.

New Fed chief Ben Bernanke attributes the inversion to a global savings glut that has sent unprecedented flows of capital from all over the world to U.S. Treasurys.

The yield curve between the 2-year and 10-year maturities inverted for the first time in five years in late December, and has recurred a number of times in early 2006.

The last time the yield curve inverted was in 2000, before the last U.S. recession and a period of aggressive rate cuts by the Federal Reserve. The yield curve briefly inverted in 1998 during the Asian financial crisis -- the only time in the past 30 years that an inverted yield curve has not preceded a recession.

Thursday's highly successful auction of $14 billion in 30-year benchmark bonds, which attracted an unusually large bid by foreign institutions and U.S. institutional investors, exacerbated the phenomenon. See full story.

The intense demand for 30-year bonds on the part of insurers and companies and governments with heavy pension-funding needs led to unexpectedly high prices, pushing the long bond's yield below expectations even as shorter-term yields climbed higher.

Market impact

The inverted curve and the possibility of a slowdown ahead rattled equities investors Friday.

"Traditionally, [the inversion] would indicate that we are headed for trouble,"