Is It Too Late To Buy Stocks? by Teresa Fernandez
This often-ignored indicator may have the answer.
When it comes to interest rates, few indicators are talked about more than the yield curve and yet, it is never used as a decision-making tool for buying and selling stocks. It remains in the background of discussions about when to buy, when to sell or, for the braver, more experienced investors, when to go short. During normal times, when long-term yields are higher than short-term ones, the yield curve looks like what you see in Figure 1. Today, for example, a 10-year Treasury note yields 1.57%, compared to the 90-day Treasury billís yield of 0.1%, or a yield premium of 1.47% points.
RISING YIELD CURVE
Many economists think that a rising yield curve means that investors believe there will be strong economic growth in the foreseeable future. Throughout the 1990s, not only was the yield curve positive during the entire decade, but it was a steeply rising one, where the differential between short-term and long-term rates peaked in April 1992 ó when, for example, the 10-year Treasury note yield of 7.58% was a full 3.81 percentage points higher than the three-month Treasury bill yield of 3.77%. The decade witnessed a period of declining interest rates that saw the fed funds rate decline from 8.32% on January 1, 1990, to 6.48% on December 27, 2000.