Wednesday, September 21, 2011

The Yield Curve: September 21, 2011

The above is the yield curve for today and the past year at selected points. As expected it has started to totally collapse. As we have said before it presents both opportunity and risk. As opportunity it makes potential borrowing of some interest. As a risk, for those on fixed incomes where the sources if returns on low risk investments it means that you need 50% more in assets in your accounts to get the same payout with the lower yield. That places a tremendous burden on the elderly as well as on pension funds with low risk investment profiles. Imagine what that does to state pension plans! It means that defined benefit plans are now underwater by that much more in just a year! That means an added effective burden on the taxpayers of those states!
This is the spread, and it also is tanking. Namely the difference between 30 years and 30 days is only a small percent. That means that the expected growth in the economy is most likely negative!\
The above is 90 day and 10 year spreads and rates. 90 day money is almost free. 10 year money is at an all time low. The spread is also at an all time low.

Thus one wonders what the FED is doing. The costs will be borne by all of the taxpayers. It is not as if the banks are lending it out. The banks are using the free money to still make high risk investments and receive great returns. Again on the backs of the taxpayers.