Even though long-term securities typically earn higher yields, short-term securities are more sensitive to current economic conditions, and their rates exhibit a wider fluctuation. The level of liquidity in the banking system deteriorates whenever the gap between short-term rates on 6 month commercial paper and long-term rates on Moody's Aaa Corporate Bonds narrows. A narrowing of this gap on the downside signals that financial markets are tightening, and rates are nearing their trough. A narrowing on the upside signals that credit is continuing to tighten, and that rates will continue to rise.

Periods of extreme financial squeeze develop when short- term rates move above long-term rates. When this occurs, the yield curve becomes negatively sloped. A subsequent movement of short-term rates down below long-term rates signals that the latter have reached their peak and will soon begin to fall.