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Tim, great info. Yes, at a time when the economy is still growing, the flat
yield curve is a clear signal to the Fed that rates at the short end are too
high, and need to be revaluated. Through the control of the federal funds
rate, they create a "floor" through which the free market on the short end
can't pass on it's own.
The one spread that jumps out at me right now is the long T-Bills (30 day) /
short 5-years, based primarily on the logic you presented. According to
the yield curve I saw in the WSJ last night, the curve is so distorted right
now that 5-years are actually yielding LESS than T-Bills (although that
curve is probably based on the cash market, and the futures could be
different).
To me, this almost looks like a no-brainer, until you remember that this
type of thinking is what got LTC in big trouble (relationships between debt
intruments tend to return to their historical norm)!
Bruce
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