Breathtaking Flattening Speed Includes Major Inversions
Major portions of the yield curve are now inverted. This is a result rates rising much faster at the short end of the curve than the long end.
And today, we had a bond rally (yields declining) at the extreme long end coupled with rising yields at the short and middle portions of the curve in anticipation of Fed rate hikes.
The speed at which this happened is stunning.
At the beginning of the year the spread between the 3-year treasury note and the 30-year long bond was 97 basis points (0.97 percentage points). That spread is now negative 14 basis points, a significant inversion.
The 2-10 spread, a widely followed recession indicator, inverted today on a closing basis. That spread is negative 6 basis points.
Treasury Yields December 2021 to Date
Bearish Flattener
The above chart depicts a bearish flattening process. Yields have been generally rising but much faster in the middle of the curve than the long end. If the Fed starts hiking as widely believed, the short end will flatten quick too.
For example two more hikes by the Fed will send yields up by 50 basis points at the short end, and may do nothing at all on the long end.
A bullish flattener happens when yields fall with the long end falling faster.
A bearish steepener happens when yields are rising but faster at the long end.
30-Year Yield May Have Peaked
Note the recent rally at the long end. If you are short the TLT (20+ year duration). With that rally, I am going to offer some unsolicited advice: Close the short. Long TLT is a better bet.
The last couple of days have provided a huge warning signal that the high yield on the long bond is now in.
My advice presumes the Fed keeps hiking or the economic data gets weaker. I suspect that will be the case for the next month if not through the June FOMC meeting because economic data has been strong even as recession signals flash.
Yield Curve to Scale
There are very significant inversions in place. Those inversions are likely to increase the faster the Fed hikes.
The 3-10 spread is inverted by 20 basis points, almost a full quarter-point hike. There are numerous inversions between 2 and 10 years.
Again, this is a huge recession signal.
I had been struggling to find a reason for the 20-30 inversion, the first part of the curve to so so. I now wonder if that’s an anomaly of people shorting TLT, the 20+ year treasury ETF or other short treasury funds.
Despite yields rising elsewhere, the yield on the 30-year bond has fallen from 2.60 percent on March 22 to 2.40 percent today.
I take that as a warning sign to treasury shorts.
What About Jobs and the CPI?
Despite the strong jobs report today and continuing inflation, I would rather take my clues from the bond market.
For discussion of the CPI and PCE, please consider Four Measures of Inflation Plus a Spotlight on Food
And for today’s job report, please see Nonfarm Payrolls Rise by 431,000 and the Unemployment Rate Dips to 3.6 Percent in March
Jobs data is very lagging. The bond market has a different message. Are you listening?
This post originated at MishTalk.Com.
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