December 12, 2006

The expected increase in short yields suggests that the market is taking seriously the Fed statements and considers a rate hike far more likely than a rate cut during the coming quarter. Our interpretation of the futures market suggests that a rate cut is not coming until the second quarter of 2007. An inverted yield curve is disturbing because, more often than not, under a price rule, a yield curve inversion is a harbinger of a major economic slowdown.

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