According to a yield curve is a “graphic line chart that shows interest rates at a specific point for all securities having equal risk, but different maturity dates. For bonds, it typically compares the two- or five-year Treasury with the 30-year Treasury.”

Yield curves have loudly entered the economic discussions. If you grab the red line [Note: Java] in the yield chart, you can see how short term and long term rates have changed in relationship to one another over time.

The traditional economic model for banks is being turned on its head. Banks typically borrow at lower short term rates and lend at higher long term rates, capturing the spread. Since the yield curve is flattening, there is little difference between both rates creating bottom line pressures for lenders.

However, in a recent article in American Banker [Note: Paid Subscription] suggests that the yield curve, when inverted, could actually spell lower mortgage rates next year.

>John Herrmann, chief economist at Cantor Viewpoint,
>a unit of Cantor Fitzgerald …Mr. Herrmann’s outlook is
>somewhat contrarian. Most economists expect rates
>to rise as the economy strengthens. But Mr. Herrmann
> told MSN that mortgage rates could be headed lower –
>perhaps to 5.25% by the end of the year and eventually
> “grinding down to 5%” next year.
>A deceleration of economic growth, competitive pressure
> in the mortgage industry, and a trend toward tying
>30-year mortgage rates and hybrid loan rates closer to
>the five-year Treasury rate than the 10-year are all
>contributing factors, he said.
> His reasoning? Without housing, economic growth
> is way below potential.

[More on yield curves to come…](