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Hello Curve Watchers, We Have a 5 Basis Point Inversion to Discuss

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25 comments on Hello Curve Watchers, We Have a 5 Basis Point Inversion to Discuss

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Yield Curve Notes

  • Data is as of the market close on Friday, October 29.
  • The chart is to scale. Every bar is 3 months with the Fed Funds Rate representing 0 months. 
  • I extrapolated the values between numbers uniformly.
  • The 20-year yield is 1.98% and is 5 basis points higher than the 30-year rate at 1.93%. This is a 5-point inversion.
  • The Fed Funds Rate is also inverted with the 3-month rate at 0.05% and the 6-month rate rate at 0.07% but those inversions are not as meaningful.

I suspect the 7-10 year range will be the next to invert as there is only 11 basis points between the numbers. 

Inversion is neither a necessary nor sufficient condition for recession but most recessions do start with inversions. 

The inversions are tiny at this point but worth watching. 

Thanks for Tuning In!

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Mish

Mike Shedlock

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25 Comments
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amigator
amigator
4 years ago
Interesting stuff but we are past the point of traditional economic analysis. Since 2008 when they created close to a trillion dollars within a week there will be no major downturn, allowed. The fed will throw all the money needed to minimize the crisis. This will work for a while not sure how long. It will not work forever but we have many years to go.  Sit back and enjoy! Pat yourself on the back because we have elected and continued to elect the politicians that will allow this to continue on until it can’t! USA…USA…USA…USA…
Can you say S&P 20,000!
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Christoball
Eddie_T
Eddie_T
4 years ago
Reply to  Christoball
If I weren’t constitutionally opposed to buying stocks with a P/E ratio of over 100, I’d be tempted to buy Zillow here. Their earnings have been great this year, and this is the closest Z has come to approaching fair value in years. The chart looks like a bottom too, or close enough. 
If that link was supposed to somehow point to real weakness in housing, I think it fails on the merits. Z has an adjusted earnings growth rate of 71%.  Zillow will be fine.
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Christoball
Christoball
4 years ago
Reply to  Eddie_T
Are they buying puts or calls???????
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Doug78
Doug78
4 years ago
Explaining Capitalism to Aliens
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dmartin
dmartin
4 years ago
Who cares? I’ll stick with the 2 year over the 10 year inversions for meaningful insight.
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Bronco
Bronco
4 years ago
“Inversion is neither a necessary nor sufficient condition for recession but most recessions do start with inversions.”
…
Recession much closer than many here fathom.  China won’t save us this time.
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caradoc-again
caradoc-again
4 years ago
It’s all just one big theatre show with everyone an actor.
Each in turn needing to play act at the wheel and tinker to appear they have any clue when what should have been done years ago was to allow the system unwind itself. Now too big and scary and close to taking us all out to the wood shed.
We are in the crapper but no one dare tell the truth of the situation least of all the supposed leaders.
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Captain Ahab
Captain Ahab
4 years ago
MIsh wants to retire and needs $50,000 for his annual estimated expenses (he lives frugally on his farm, raising goats and brussel sprouts). He doesn’t want to invest in risky assets, so he buys 20-year T-bonds at 2%. He needs $2.5 million in savings, if he doesn’t want to draw down his principal.
However, ‘suddenly’ inflation is running at 5% per year. MIsh is $crewed, thanks to the Fed. His only choice is to sell his bonds and invest in risky assets. Then, a market crash reduces his principal to $500K….
Eventually, we will discover the dangers of yields close to zero.
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TCW
TCW
4 years ago
Reply to  Captain Ahab
In that scenario it’d definitely be better to stay in bonds and eat the $1500 inflation loss per year.
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Eddie_T
Eddie_T
4 years ago
Reply to  Captain Ahab
You get very dark when you’re sober. Stop visualizing Mish having bad luck and open a beer.
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Captain Ahab
Captain Ahab
4 years ago
Reply to  Captain Ahab
FYI, goat milk is doing just fine, and the brussel sprouts are, too.
However, after the first year, Mish needs$52,500, the second year $55,125, the third year $57,881, the fourth year, 60,775…  Like I said,Mish is $crewed. I am not being maudlin when I say the Fed will be single-handedly responsible for the biggest lost of living standard in USA history. And the people who will be hurt are those who saved.
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Kimo
Kimo
4 years ago
Reply to  Captain Ahab
Hard to imagine that a market crash would have no effect on T-bond rates, or inflation.  Either t-bond rates move to +8%, or the FED rescues the market and we’re back where we started.  In relative terms, no drastic short term harm to expected goat feed aquisistion over time.
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Captain Ahab
Captain Ahab
4 years ago
Reply to  Kimo
A big enough ‘market crash’ might send t-bond rates to 18%. At 8% market interest rate, Mish’s $2.5 million in 2% coupon, 20 year bonds are worth $1,027,277.89  ASSUMING, the change occurs immediately after he buys the bonds, and the coupons compound yearly.
There is a timing problem in that the sudden inflation will likely affect interest rates/yields so the stock market would likely adjust at the same time as  his bond portfolio loses.  To lose another 50%, there would need to other factors at work–like FOBFO (fear of being f*&ked over), aka panic of a kind we have not seen for a long long time.
Keep in mind that at near-zero interest rates, the Fed  is played out. Yes, the Fed could send rates negative, but at that point their own holdings are even more at risk. Imagine bailing out the Fed?
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Eddie_T
Eddie_T
4 years ago
Reply to  Captain Ahab
I think you make a great point here, but you’re only seeing part of the picture, I think. One has to assume that bond investors have cash (and leverage) and understand something about how to trade yield curve inversions. 
I’m not a bond guy, but  I can see that a serious yield curve inversion makes a trading opportunity…..in the past, intermediate term bonds have outperformed most (if not all) other assets coming out of one of these holes. It’s just a different market with different rules. Making money in bonds is clearly not about the  yields, it’s about catching the trend when price is rising.
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anoop
anoop
4 years ago
the bond market is broken.  inversions don’t mean what they used to.
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Bronco
Bronco
4 years ago
Reply to  anoop
not broken.  
Acting rational considering what is occurring (outside of equity insanity).
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Captain Ahab
Captain Ahab
4 years ago
Reply to  Bronco
The risk-return relationship affects all assets, not just equity.
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Bronco
Bronco
4 years ago
Reply to  Captain Ahab
Bonds = “smart” money
Telling me all I need to know … Deflation on tap as bubbles burst.
Some bubbles in early stages of deflating outside of US.  Periphery (EM) will deflate first … driving $$s to Core (DM) which AT FIRST will be beneficial to Core assets, but they too will yield to deflation.
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Captain Ahab
Captain Ahab
4 years ago
Reply to  Bronco
It might proceed in the manner you suggest. Then again, derivatives are vast. Also, algo trading has never had this potential. Another factor is too many first-timers are invested in risky assets. Having made money on the upswing, they do not see risk and have no idea of what happens on the downside. They will panic like never before. All that and more, plus the Fed is backed to the wall. Central banks are stacking gold…
I think “smart” money is not in bonds.  Also, I go back to that risk-return relationship–thanks to the Fed, it is very distorted so risk is not properly priced.
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AWC
AWC
4 years ago
So, do curve inversions still have any relevance in relation to recessions, under the brave new world of MMT? 
Or, wasn’t it our illustrious Treasury Secretary, Grandma Yellen who said there would be no more recessions in her lifetime?
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Eddie_T
Eddie_T
4 years ago
Reply to  AWC
I’ll take the correlation as about as accurate a predictor of a coming recession as there is….even now. But if you look at history, the “oh sh*t moment” usually happens when the 10 year and the 2 year reach near parity. We aren’t nearly there yet.
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AWC
AWC
4 years ago
Reply to  Eddie_T
Some day, some way, the law of diminishing returns is going to catapult the central planners off the treadmill and into the brick wall. Considering the “diminishing intelligence levels” of each new group of politicians we are cursed with, the day of reckoning might not be too far off.  😉  
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Eddie_T
Eddie_T
4 years ago
Not a good sign for most risk assets. 
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Captain Ahab
Captain Ahab
4 years ago
Reply to  Eddie_T
Not a good sign for ALL assets, risky or not.  Near zero interest rates are problematic.
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