C/G economics and yield curve et all

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From: Zhang, Yangkun (Yangkun.Zhang@FMR.COM)
Date: Tue Oct 17 2000 - 07:34:39 PDT

As an example of a yield curve from Bloomberg, take a look at


Please note that the yield on differing maturities are NOT THE SAME. The fed
sets the discount rate, all the way to the left and is set by fiat. The
discount rate is what is set by the fed by they "raise the rate" to fight
inflation. (If you want articles on how this mechanism works, I'll be happy
to email you.) The 30 year yield, all the way at the right, is set by market
consensus by bond traders, and as you notice, is far lower than the fed
discount rate. This indicates that the market believes that the future
[discount] rate will be far lower, and hence the market belief that our
current goldilocks economics--i.e., not too hot, not too cold--will
continue. Well, at least that's what it USED to indicate. The fact of the
matter is, the surplus and the draining of available bonds from the market
in the past year or so has disrupted the way the yield curve works. But for
period up to 1997, it is quite reliable.

So while Grlygrl201@aol.com is quite passionate in her position, she is also
quite wrong.

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