I have been tracking, as has nearly everyone else, the constant flattening of the yield curve to the point that portions of the curve are now inverted.

Despite the near-relentless flattening on most portions of the curve. the 30-year to 10-year spread started diverging in July.

I have been watching this for weeks and the 30-year yield is the fastest to rise and slowest to drop on a relative basis. Here are a couple of recent screen shots to show what I mean.

Relative Weakness of 30-Year Bond

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This does not happen every day, but on balance it has been happening since July 9.

What's It Mean?

  • This is not necessarily easy to decipher, and perhaps it is just random and means nothing at all.
  • However, I suggest the long bond is signaling huge concerns over increasing deficits and mounting debt, now over $21 trillion.

Fed Rate Cuts

The bond market has also signaled the end of rate cuts. I posted charts yesterday in Rate Hike Odds Dive: Any Rate Hikes in 2019? Sucker Rally? Musical Tribute!

Yesterday I asked: Rate hikes coming? Full inversion?

With a tribute to Buddy Holly, here was my answer: Maybe Baby, but I doubt it.

Enter Kudlow

Today we see that White House economic adviser Larry Kudlow expects pause on Fed rate hikes.

Recession Coming 2019, Full Inversion Not

I think a recession in 2019 is now baked into the cake.

If so, and if the Fed does stop hiking, I doubt the 3-month to 30-year yield curve inversion that people seem to expect will occur.

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Gold vs 30-Year to 10-Year Spread

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Gold's action roughly matches the direction of the 30-year long bond to 10-year treasury note spread. Bear in mind this just started happening in 2006 following a long pause in the issuance of the 30-year bond.

Longer charts do not show that correlation. But other spreads are completely random.

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So, What's That Mean?

  • Again, it could be totally random.
  • It could also mean waning and increasing concerns over enormous debts forever into the future.
  • I have long been a proponent that gold will take off once it becomes apparent the Fed will not get in the rate hikes that were implied. If so, and if the Fed does pause, gold is one asset class that rates to do well.

Faith in Central Banks

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Click on chart for larger image.

Yesterday, I Tweeted that gold was a measure of faith in Central Banks.

I received no answer from Schiff, but others did join the conversation.

Q&A on Deflation

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I failed to note 2000-2001 in my answer. There was a tremendous credit bust due to bad loans to dotcom companies and bank loans to South America. The Greenspan Fed responded with another bubble and gold took off.

In the real world, it's credit and the value of credit on the books of banks that matters. We saw it in 2000, in 2007, and we are going to see it one more time.

Central Bankers Are Bureaucrats

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Contemplating the End of the Bond Bull

In recession, I expect long-term yields to drop. How far?

I do not know. But the implications are clear.

Implications

  1. The long-bond is signaling a huge warning that the next move down in yields will be the last one.
  2. That signal is consistent with warnings over increasing deficits and mounting debt as far as the eye can see.
  3. It's also consistent with decreasing faith in central banks, especially the Fed.

The wizards at the central banks are likely to do nearly anything to prevent a credit wipe-out.

Add it up and a strong gold bull market seems highly likely.

Mike "Mish" Shedlock

Central Bank Hubris Bubbles to the Surface

Albert Edwards at Society General commented today on Central Bank Hubris, deflation, and the flattening of the US yield curve. Here are some email snips.

Central Bank Sponsored Madness: Inversions on Negative-Yield Bonds

German bonds are inverted in 19 places despite the fact that the German bonds have a negative yield for 13 years.

Reader Questions on Yield Curve Inversions as a Recession Indicator

Reader Eric is curious about yield curve inversions. He writes …

Yield Curve Inversions Again Stretch Out 7 Years

Huge portions of the the yield curve are inverted. Most of the inversions are by tiny amounts, but it's another warning.

Mindless Central Bank Lemmings Head Towards Cliff

John Hussman had an interesting post this week on a The Decade of Zero and its Chaotic Unwinding.

Fed-Proof Bond Bet?

The yield curve is the flattest since 2007. Nonetheless, traders think it will get flatter. The bond bet du jour is the next Fed chair will keep hiking but not as much as the Fed thinks.

Negative Yield Curves to Infinity and a Reader Question Regarding Fraud

The entire German yield curve is negative for 30 years. Japan is poised to join the club.

Bond Market Paralysis: What Happens When Central Banks Own the Market? Mish’s Sure-Fire Proposal

Here’s the question of the day: What happens when central banks own the market? The answer comes from Asia where Japan’s Government Bond Market Grinds to a Halt and the yield on 10-year Japanese bonds did not move for seven days.

US Recession Odds Hit 55% According to Deutsche Bank Model

A Deutsche Bank yield curve model says the odds of a US recession are now 55%. Specifically, the model notes the flattening of the yield curve, something I have mentioned numerous times recently.