When the Federal Reserve lifts the fed funds rate by quarter-point to 4.50% in January 2006, as widely telegraphed, the yield on the Treasury’s two year note could be higher than ten year yields, producing what is known as an “inverted” yield curve. Then, the bond market was inverted, but stock market investors were not afraid, and argued that its shape reflected the Clinton administration’s retirement of longer term debt from huge budget surpluses. So while the Fed was raising short-term rates, China, Japan, and Arab oil producers were putting a lid on longer term interest rates.The loss for China´s foreign exchange reserves would be extremely serious,” Yu said.
If China slows its purchases of US Treasuries or becomes a net seller, US bond yields could rise, underming home prices.
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