Many economists view the recent "steepening" of the yield curve as a positive sign for the U.S. economy. History suggests, however, that such a move, coming as it does following a period when long-term rates have been lower than short-term rates, usually occurs just before or as a recession gets underway.

Under normal conditions, the longer the maturity of a bond or other fixed-income investment, the higher the yield. In large part, that is because investors demand a greater return to compensate them for the increased uncertainty about future economic growth, inflation, and other risks.

Occasionally, though, the differential between long-term and short-term interest rates can turn negative -- "inverted," in other words. While there are any number of factors that can cause this to happen, suffice it to say that historically, at least, an inverted yield curve has been seen as a harbinger of a weaker economy in future.

Yet, contrary to what one might assume, the return to normality immediately following an extended period of inversion seems to mark the immediate or imminent onset of recession, based on an analysis of U.S. economic data going back five decades.

With that in mind, investors should be wary of the positive sentiment surrounding the yield curve's shift upwards in recent months.

Michael Panzner is a 25-year veteran of the global stock, bond, and currency markets and the author of Financial Armageddon: Protecting Your Future from Four Impending Catastrophes and The New Laws of the Stock Market Jungle: An Insider's Guide to Successful Investing in a Changing World.

A steepening yield curve may not be a positive sign originally appeared on BloggingStocks on Thu, 14 Jun 2007 16:00:00 EST. Please see our terms for use of feeds.