![\"Ten-Year](\"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2012\/2012-06-03-tnx.png?w=525&ssl=1\")
<\/p>\nRising short-term interest rates (represented by 3-month Treasury yields on the chart below) caused negative yield differentials in 2006\/2007 which led me to warn of an economic down-turn. Yield differentials are calculated by subtracting short-term (3-month) yields from long-term (10-year) yields. Banks borrow mostly at short-term rates and lend at long-term rates, generating a profitable interest margin. But when the yield differential turns negative, bank interest margins are squeezed, forcing them to contract lending. A lending contraction shrinks consumption + investment and sends the economy into a tail-spin.<\/p>\n
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Negative yield differentials (or yield curves) are normally caused by rising short-term rates as in 2006\/2007, but now we are witnessing the opposite phenomenon. Short-term rates are near zero, but falling long-term rates are starting to squeeze the yield differential from the opposite end. The situation is not yet desperate but a further decline in long-term yields would shrink bank interest margins. Fed initiation of QE3, purchasing additional long-term Treasuries, is likely to drive long-term rates lower and exacerbate the problem. The resulting contraction in bank lending would cause another economic down-turn.<\/p>\n","protected":false},"excerpt":{"rendered":"
Rising short-term interest rates (represented by 3-month Treasury yields on the chart below) caused negative yield differentials in 2006\/2007 which led me to warn of an economic down-turn. Yield differentials are calculated by subtracting short-term (3-month) yields from long-term (10-year) yields. Banks borrow mostly at short-term rates and lend at long-term rates, generating a profitable … <\/p>\n