More For Your Money:Stop Flatlining

Newsweek, September, 2005 by Linda Stern

Long-term rates have been falling, despite the Fed's having pushed up short-term rates aggressively in the past year. That creates what's called a "flat yield curve"--where long- and short-term interest rates are within spitting distance of each other. Last week 10-year bonds were yielding only about one percentage point more than money-market funds, and that's weird.

What should savers do in a flatline environment? Stay short, if you think inflation is the biggest worry. Keep money safe in a money-market mutual fund so you can capture short-term rate increases. If you're more concerned about recession and lower long-term rates, go the other way, says bond expert Paul McCulley of Pimco, a Newport Beach, Calif., bond-management firm. You might want to buy that 4 percent,...

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