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Nearly the Entire Yield Curve is Inverted From 6 Months to 30 Years

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60 comments on Nearly the Entire Yield Curve is Inverted From 6 Months to 30 Years

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Bond yields from the New York Fed, chart by Mish.

Chart Notes and Synopsis

  • On the horizontal axis, F stands for Effective Fed Funds Rate (EFFR). 
  • The 3 and 6 represent months. I extrapolated rates between years equally.
  • A few days ago the 10-year and 30-year bonds inverted and remain inverted.
  • The EFFR is 3.83 percent. It is inverted with every bond of 5-years duration and longer.
  • The Fed will likely hike rates next week by 50 basis points. That would put the EFFR at 4.33% and invert the EFFR with every bond of 2 years duration and longer.
  • The 20-year bond trades little and is an anomaly best ignored, effectively making nearly the entire chart inverted. 

Treasury Yields May 24 to December 9 2022

Significant Inversions

  • The highly watched 2-10 inversion is (3.57-4.33) 76 basis points. 
  • The 1-year note is inverted with the 10-year note by (3.57-4.72) 115 basis points.

Yellow highlights represent a period that the treasury did not issue 30-year bonds.

These are some of the biggest inversions in history. A recession is coming, assuming it’s not already here.

Free Money

In case you missed it please see How Much Free Taxpayer Money is the Fed Giving to Banks?

This post originated on MishTalk.Com.

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david halte
david halte
3 years ago
Yields on ALL long term Treasuries peaked on Oct 20-24, and uniformly fell after Nov 7.
Oct 21, Janet Yellen publicly bellyached about the lack of liquidity in the Treasury market. A week later, she toured financial market associations and gave forewarning. Then, as if a magic liquidity stick was waved, rates on long term Treasuries fell from their peak.
Yellen’s complaint derived from her chore to fund Biden’s spendthrift initiatives, including the rise in the nation’s debt ceiling. Yellen did not want to incur service fees on trillions in debts at higher rates of interest. For long rates to fall immediately and systematically, the Fed had to suspend QT. This accounts for the inverted yield curves. Liquidity did not come from equity markets. At that time, markets were in their 12 percent rally from Oct 12 low, rising to just 15 percent off their January high.
Since Yellen’s announcement, Powell has remained obtuse about inflation and the prospect of future rate increase. He will continue the pretense until Yellen’s burden is complete. Because of the recent rise in PPI, Yellen doesn’t have the benefit of time. Then, Yellen will again make her circuit to the investment community to signal higher Treasury rates. A practice she had done many times as Fed Chairman, and which she was richly rewarded.
The Fed may be experimenting with the control of inflation by an increase in short rates alone. Which will fail, because this inflation was created by historic lows in long term rates. Note, if 10-year Treasury yields fall under 3.5 percent, history indicates Fed QE is occurring.
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DoctorFuture
DoctorFuture
3 years ago
As a fixed-income investor, I ask: “When is it expected (on the future timeline from now) that such an inversion with the 30-year might ‘un-invert’?”
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Thetenyear
Thetenyear
3 years ago
Who is going to provide funds for long term projects when lenders can make more money in a few months than they can over several years?
Tighter lending conditions will lead to delays and cancellations of long term projects. This, I believe, is why inversions often precede recessions. Lots of people point out the relationship between inversions and recessions but I have yet to see an explanation. Would be great to see Mish’s thoughts on this.
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xbizo
xbizo
3 years ago
Reply to  Thetenyear
Normally short rates are bumped up to kill off short term spending of an overheated economy. If there is a bunch of discretionary spending that dies, the decline cascades into a bunch of areas and it causes a recession. It used to be magnified by inventory build ups, but now logistic chains are much more adaptive and lean. Overleverage also brings a bunch of debt defaults and less cash to spend.
I don’t see how the economy crashes any harder than when the whole world went into lockdown 18 months ago. You can crash the stock market, new house construction, auto and appliance volume with higher rates. But with a 70% service economy, not main street.
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vanderlyn
vanderlyn
3 years ago
Reply to  xbizo
great take. the 2020 WORLD WIDE lockdown shock was a once in a century event. the rest is eyewash. the printing done in 2 years of plague years was worth decades. now we have inflation. and tight labor due to demographics and lifestyle changes and choices. you can call anything you want, but it’s once a century event. we had the great depression and ww2 in main street,
terms……. already in 2020 and 2021. now we will see the wake behind the ocean liner.
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vanderlyn
vanderlyn
3 years ago
Reply to  Thetenyear
words of wisdom. toss out all economic history of past 75 years. this is a once per century situation. inverted yield curves analyses for a few decades in great times is just nuts to hang your hat on. economic history is much longer than 1950s. not to mention, our amerikan empire is unwinding and being defeated overseas and domestically we have dystopian lifestyles for fellow amerikan empire dwellers living on streets like rabid starving dogs. reality of a imploding world wide failing empire is hard for most boomer aged to comprehend. many have already croaked without ever facing this simple reality. like roman empire collapse, the barbarians still came down the mountains from alps to enjoy the richer life in collapsing roman empire. hence the millions clamoring still wanting in for the riches. all points one direction for me. opportunity.
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8dots
8dots
3 years ago
Germany : the short and the long duration rates are all under 1Y @2.25%. The German 10Y is 1.93%. The 30Y, 1.67%. Gravity with Germany pulled US long duration down. UST10Y – DET10Y spread is shrinking, down from 2.15% to 1.5% at this week low. Speculators dump positions, before rates hikes. The Fed tell speculators how to trade. TY weekly, US10Y futures price, reached June 13 low, a trigger, and turned down. Next week it might cont down, before rising higher again. TY retracement isn’t good enough. The bond market massacre might be over, at least for a while. Bond traders might get bonuses, after an overextended bear market !
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Salmo Trutta
Salmo Trutta
3 years ago
The FED’s rate hikes have always been below the 3mo T-bill yield. That would mean, according to Daneric, a .25% hike and a wave 2 top.
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Memento.mori
Memento.mori
3 years ago
Given the bloated Fed balance sheets , I dont think this inversion means what it used to.
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xbizo
xbizo
3 years ago
Reply to  Memento.mori
Agreed. This inversion is because we had QE, 0% and negative rates and are returning to normal now. This means that asset prices should be falling back toward multiples seen prior to 2008. Might be time for looking at early 2000s history.
Inflation fighting hasn’t started yet. I don’t see that rates are restrictive where we are now. LT rates should reflect 10-year inflation expectations. Ten year rates should be 5%, definitely above 4% and NOT inverted. So we are suppressed at the long end, not high on the short end. The problem is NOT an overheated economy. It is a supply problem.
The impact is going to be on starting new capital projects that would increase supply. ROI depends on the borrowing rate and volatility. Not a great time to go in on a thirty-year investment. So inflation will stay elevated. New capital projects should be inhibited by higher debt costs. No inflation relief in sight.
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Salmo Trutta
Salmo Trutta
3 years ago
Reply to  xbizo

Friedman bastardized the
concept of AD on his car tag. It’s Irving Fishers’ transaction concept that is right.

AD = M*Vt where N-gDp is both a proxy and subset. Contrary to
Blinder, oil’s decline is determined by monetary flows, the volume and velocity
of money (not supply shocks):

01/1/2022 ,,,,, 1.998
02/1/2022 ,,,,, 2.011
03/1/2022 ,,,,, 1.633
04/1/2022 ,,,,, 1.382
05/1/2022 ,,,,, 1.320
06/1/2022 ,,,,, 1.231
07/1/2022 ,,,,, 1.195
08/1/2022 ,,,,, 1.280
09/1/2022 ,,,,, 1.143
10/1/2022 ,,,,, 1.094
11/1/2022 ,,,,, 0.851
12/1/2022 ,,,,, 0.549
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xbizo
xbizo
3 years ago
Reply to  Salmo Trutta
Not sure what you are saying. I think that you are saying the velocity of money is falling and that will address inflation. These ideas are not my forte as much as pricing power arguments a la Michael Porter’s competition theories and the margin you need over inflation to be a bond buyer. Would you write a little more?
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MarkraD
MarkraD
3 years ago
Reply to  xbizo
“The problem is NOT an overheated economy. It is a supply problem.”
I’ve been expressing concern the Fed is suppressing demand for a problem that’s at least partially supply, but there’s no denying demand does have a part in certain sectors, the job market/labor shortage and housing prices show that.
Food/agriculture and energy currently are a supply problem.
.
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xbizo
xbizo
3 years ago
Reply to  MarkraD
I think flooding cash during C19 into the economy caused demand issues, and that cash is drying up. Eventually the demand that was pulled forward will settle out. Within a year I’d say
Supply issues are much stickier. With retirements, I argue that the boomer demographic is also a workforce supply problem in the U.S.. We are short doctors, nurses, accountants, construction workers. The only short term solution I see is to encourage immigration in categories we need.
Raising interest rates will not kill off most demand this time. There’s not enough at the margin. As higher rates raise the costs of doing business, higher rates could even be inflationary. They will be for any business with pricing power. High rates are also inflationary if you consider the rising interest payments paid by the U.S. to its bondholders.
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RonJ
RonJ
3 years ago
Speaking of rates, a Zero Hedge headline: “Store Credit Cards Hit 30% Interest Rates As Consumer Balances Rise”
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Salmo Trutta
Salmo Trutta
3 years ago
“Are you not entertained? Are you not entertained? Is this not why you are here?”
Friedman called required reserves a tax
Volcker called all reserves a tax
The economy is being run in reverse. Under Reg. Q Ceilings, the nonbanks (intermediary financial institutions) were given a preferential interest rate differential, in the borrow short to lend longer, savings->investment paradigm. An inverted yield curve induces nonbank disintermediation. It siphons funds from the nonbanks, decreasing the supply of loan funds. It inverts the savings->investment process and the T-Bill standard (volatile short-term funding to carry assets, creating duration and credit mismatches). Are we not hedged? Watch credit default spreads.
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8dots
8dots
3 years ago
The Dow 30 members are divided by weight. The higher the price the higher the weight. United health is 12% of the weight. Goldman is 8%, HD is next. AAPL & Salesforce are 2.8%. The Dow don’t care about AAPL & CRM misery. In order to go down UNH & GS must plunge.
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vanderlyn
vanderlyn
3 years ago
Reply to  8dots
DOW index returns is the greatest scam. after the privately owned FED RES of NY. like the old classic book titled “where are the customers yachts” . middle brows practically beg to be clubbed like baby seals.
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JackWebb
JackWebb
3 years ago
I apologize in advance for a brief, off-topic post. Mish, I suggest that you write a column about marijuana “legalization” and the Econ 101 of “legal” MJ. I know a good deal about the underlying fundamentals. In fact, I volunteer to write a guest column on the subject. For a preview, see the comments by “Actually Knows Anything” (one of my many pseudonyms) at the link below.

https://jonathanturley.org/2022/11/25/reefer-madness-demand-for-illegal-pot-soars-in-california-due-to-high-taxes/#comments

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vanderlyn
vanderlyn
3 years ago
Reply to  JackWebb
legal weed investing is the greatest trading market i’ve seen in all my long long life. emphasis on trading. i also have been an advocate for choice of poison like booze, for decades. been investing in legal weed since she went legal in CO and canada and uruguay. germany in 2024 is gonna blow the lid off the bong. NYC / NJ is a fine opportunity. to trade. the WEED reits are especially great deals. roughly 3x the rent.
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8dots
8dots
3 years ago
On Dec 1 the Dow made a higher high, above Aug 16 high. Dec 1 high was only 6.7% below the top, but analysts are gloomy. The weekly Dow line chart formed an expanded triangle, a megaphone, since May. After correction the Dow will popup above Jan top, before misbehaving in violent reactions. Follow the charts. Throw econ 101, Jamie Diamond, Brian Moynihan and the blue zone predictions to the garbage bin.
The Fed don’t want to kill inflation. The Fed will use negative rates to KILL DEBT.
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Scooot
Scooot
3 years ago
Reply to  8dots
“The Fed don’t want to kill inflation.”
Maybe not but voters do so the Fed needs to get it under control before 2024.
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8dots
8dots
3 years ago
Reply to  Scooot
Scooot, the labor force is divided by tranches. Those who were left behind in the devastated flyover areas, who got new skills in community colleges, tech schools or on the job training, – in the mfg or the service sectors will earn wages above the inflation rate. Many will be left
behind, especially poor elderly.
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Christoball
Christoball
3 years ago
Reply to  8dots
Economic triage is brutal. Who will be saved? Who will be left to perish? We need to make sure we take care of one another, because the machine does not care.
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RonJ
RonJ
3 years ago
Reply to  Christoball
The machine does not care. Duke University Hospital refuses to give a 14 year old girl, Ulyia Grace, a kidney transplant, because she has not received a Covid shot. The shot does not prevent contracting Covid and the girl has already had Covid previously. The hospital claims they are following CDC recommendation, but the CDC recommendation is not a legal mandate, so the hospital has no legitimate reason to refuse the surgery.
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Scooot
Scooot
3 years ago
Reply to  8dots
I don’t disagree but the Fed will still try in the near future because they need to get it under control for election year.
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vanderlyn
vanderlyn
3 years ago
Reply to  8dots
learning skills at any age is easier than watching sports and drinking beer. age old wisdom. in modern rich world, lazy and unskilled can still be obese and never experience hunger. i’d say that’s a blessing and a curse.
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MPO45
MPO45
3 years ago
And the best way to profit is to buy short term T-bills and roll them month to month. I do regret not buying some 20 year treasuries when they peaked at 4.57% back in October. While I believe we may have a short term reprieve in inflation over the next 12 months, it will be short lived. The labor demographics continue to get worse and the Fed lowering rates won’t fix that.
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Captain Ahab
Captain Ahab
3 years ago
Reply to  MPO45
Rolling short-term debt is a ‘caution’ strategy. Expecting a banking crisis plus recession, I did the same thing 14+ years ago with CDs (FDIC insured), as did many savvy investors. Eventually, as interest rates dropped, I shifted to gold…
Conventional bets are based on predictability. However, this time around, predictable, it is not.
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MPO45
MPO45
3 years ago
Reply to  Captain Ahab
I will roll T-bills until the Fed stops hiking. Only smart thing to do right now. I did pick up some SLV yesterday and did a buy/write to earn 3.5% in 40 days much like my XOM trade.
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Doug78
Doug78
3 years ago
The chart shows that this time people believe the Fed when they say they will do what it takes to kill inflation including throwing us into a recession. The chart also shows that investors believe the Fed will succeed and that rates will not go back to the almost zero levels that were experienced before. To me those bond yields and prices are tempting since the stock markets will probably be in the dust bin for a good while longer.
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Scooot
Scooot
3 years ago
Reply to  Doug78
“The chart shows that this time people believe the Fed when they say they will do what it takes to kill inflation including throwing us into a recession.”
Very much so. If you buy say the 10 year at 3.57 and inflation remains the same or there is only a small improvement you’re locking in a “real yield” loss together with the prospect of a significant capital loss as the Fed doubles down in its efforts to tackle inflation or the market begins to fear as much. Whereas if they’re successful and they eventually begin to ease again the curve will swing less negative and the capital reward of holding the long end might not reflect the past risk of holding it. Additionally as time passes and the duration shortens the yield creeps up the curve , admittedly only a few basis points a year at the moment.
Personally I think the markets got ahead of itself, 3.57 won’t look very good when Fed funds are at 5.5%, even though you’d think they’d be on the way to getting inflation under control. Just my tuppence worth. 🙂
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Doug78
Doug78
3 years ago
Reply to  Scooot
If inflation doesn’t come down then or of course I will get hurt but less than those in pure cash. If on the other hand if the recession is deep we might get deflation and I make out like a bandit. I could also buy stocks but if we are in a multiple year bear market I will get killed. Since the economic scenarios change with each new released data I will probably scale in and out. In the worst scenario, that of inflation taking off like a bat out of hell, then I lose big time so I will use my dwindling resources to buy food, guns, medicines and a bunch of really mean guard dogs.
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Scooot
Scooot
3 years ago
Reply to  Doug78
“but less than those in pure cash.”
Not sure that’s right, you’d lose the present value of 10 years worth with the bond.
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Doug78
Doug78
3 years ago
Reply to  Scooot
If you keep it to maturity you would lose less which is why I would be buying short to medium term bonds. I do like the cash flow and would not be trading them so the net present value wouldn’t be my principal worry.
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vanderlyn
vanderlyn
3 years ago
Reply to  Scooot
i’m in camp of this is going to take years of rising rates by central banks to tame inflation. i’m just glad for young folks especially, and old geezers that did not save enough, there will be plenty of jobs. of course we all lose purchasing power with inflation past few years and more to come. just face the music, we all lose.
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Captain Ahab
Captain Ahab
3 years ago
Reply to  Doug78
“… rates will not go back to the almost zero levels that were experienced before…”
The long term rate should compensate for real GDP growth plus inflation. A healthy (growing at 3% per year in real terms to match population) economy with the usual 2% target inflation gives a 5% interest rate (see long term history of T-rates). The 30-year rate is still 150 points down…
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Doug78
Doug78
3 years ago
Reply to  Captain Ahab
I wouldn’t buy the 30 year just yet because inflation could still rise and the long end is too volatile.
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Captain Ahab
Captain Ahab
3 years ago
Reply to  Doug78
My comment was for a ‘normative’ (rational) yield curve. Getting there could be very upsetting, and patience is essential. Back in the early 1980s, I bought Australian Govt 30-year bonds at 12%, knowing rates could not stay at 12% for 30 years without continued horrific inflation. A couple of years later the long term rate was back to 5%…
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Doug78
Doug78
3 years ago
Reply to  Captain Ahab
That was a once-in-a-life-time trade. The high inflation of the 1970’s followed by the inflation bust created the best ever opportunities to make money on the bond’s yield and the price appreciation. We remember things like that but the younger ones do not. For them zero interest rates is normal.
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vanderlyn
vanderlyn
3 years ago
Reply to  Captain Ahab
sweet. i remember going to banks for dad to buy him the longest term CDs in late 70s early 80s.
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8dots
8dots
3 years ago
Use a patent lawyer to make the yield spreads your property.
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8dots
8dots
3 years ago
Mish great chart is the clusters of all rates between 3M and 30Y, forming bodies and bottlenecks, forming trends.
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8dots
8dots
3 years ago
The 6M is a lever to raise the 10Y above 5%, The yield curve, after hitting nadir, might popup above 2010 highs, forming an inverse triangle,
a megaphone, with 2000 high, that will send it above the 90’s high, to 6% – 7%, before moving higher, after a light recession. Why : the banks will lend money, making more money than by parking idle in the Fed, increasing liquidity in the Oren Cass econ.
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MarkraD
MarkraD
3 years ago
Having been fat, drunk & stupid for so long, the Fed’s putting us into double top secret probationary recession.
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pimaC
pimaC
3 years ago
has this ever happened before, where there’s an inversion at every level?
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vanderlyn
vanderlyn
3 years ago
wonderful chart with yields to scale. i wish this was done more often. thanks. i’ve been perusing the literature of post war time periods in history of world. i keep harping on the insight the economist newspaper realized this summer. covid world wide lockdown is more similar to a world war or civil war when everything in an economy is upended and lockdowned. and the post “war time/covid” years are usually inflationary booms of people spending and printed money from war against covid being spent. if people want to call raging inflation and tight labor market as far as eye can see with demographic changes a recession than so be it. it just doesn’t seem like anything anyone has seen since the late 1940s, the post ww1 roaring 20s, the post civil war booms and busts and booms……..i’m just afraid the 50s is not far back enough to capture such a monumental event as the plague that shut down the world. call it covid or wuhan flu or great hoax……sarc please LOL. great charts. thanks mish.
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Zardoz
Zardoz
3 years ago
Reply to  vanderlyn
I think of it as “The Kookening”
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Captain Ahab
Captain Ahab
3 years ago
Reply to  vanderlyn
Do not overlook the effect of faux debt and negative real interest rates on a global scale. There is nothing comparable in economic history.
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HippyDippy
HippyDippy
3 years ago
I’m curious as to why you never mention the possibility of depression. This entire debacle is caused by the state. In every country. And in every country they are doing the exact opposite of what any intelligent person would do if they were trying to fix this mess. Add to that the clown world culture which is also global and state mandated, and on and on and on. It almost looks like this is all intentional. I believe it is, and that I won’t like what they are wanting to happen. However, I also believe they really are incompetent enough to screw things up on so many levels, economics being only one of the infinite areas they are incompetent in. With the present level of stupidity in our elite geniuses ranks, there’s no way the world is going to stop at a recession.
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Captain Ahab
Captain Ahab
3 years ago
Reply to  HippyDippy
This is a leap, whether unsubstantiated or not, it must be considered. Talk of a ‘Great Reset’ is NOT an unfounded rumor. However, ‘dumb’ is not a prerequisite. The tendency is for government is to replace freedom and competition with state-mandated controls, which reduces effectiveness and efficiency in the long term.
In recent posts, I’ve talked about risk and uncertainty. We deal with risk quite easily–trading off risk and return, essentially reallocating the probability distribution. Uncertainty is something else–our species does not deal well with unpredictability. When it occurs, we react with more ‘control’ measures–much the same as what caused the problems in the first place.
I am not the only one who believes we are headed in a period of extended unpredictability. The outlook is not positive.
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Six000mileyear
Six000mileyear
3 years ago
My credit union CD’s do NOT have an inverted yield curve. My bank is probably using an arbitrage strategy of borrowing for 12 months and lending to the government at higher interest rates for the same or shorter duration. This would be a stealth capital injection for banks.
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Mish
Mish
3 years ago
Reply to  Six000mileyear
The entire thing is a stealth injection to banks
Free Money
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Bam_Man
Bam_Man
3 years ago
Reply to  Mish
^^^THIS^^^
Paying higher and higher rates on Excess Reserves, The Fed is in a desperate race with time to provide its big member banks with a sufficient capital buffer to (hopefully) withstand the epic shitstorm of loan defaults that is just over the horizon.
“Fighting inflation” and “defending the Dollar” are very minor considerations. Or just talking points.
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Lisa_Hooker
Lisa_Hooker
3 years ago
Reply to  Mish
Stealth?
I’ve been plotting the IOER since they started.
Data just sitting there at the St. Louis Fed for all to see.
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vanderlyn
vanderlyn
3 years ago
Reply to  Six000mileyear
anyone braying about how dumb the fed or treasury is, has got to go back to school. the ruling class has been picking the pockets of the middlebrows, by using these tools. toss out all your college(read nursery rhyme) textbooks. all hooey and propaganda. the middlebrows really are arrogant and ignorant if they think the fed or treasury doesn’t know what they are doing. see andrew jackson writings perhaps to be schooled in grifter 101.
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Dsap
Dsap
3 years ago
Reply to  vanderlyn
Which writing from Andrew Jackson’s collection are you referring?
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vanderlyn
vanderlyn
3 years ago
Reply to  Dsap
sorry i cannot point to a specific place. i have been reading history for decades. on top of going to college for past 40 years. dovetails nicely with FX and equity trading for my daily bread and circus.
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Lisa_Hooker
Lisa_Hooker
3 years ago
Reply to  vanderlyn
“You are a den of vipers and thieves. I intend to rout you out, and by the Eternal God, I will rout you out.” – A. Jackson
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Captain Ahab
Captain Ahab
3 years ago
Reply to  Six000mileyear
Why would banks need a stealth capital injection? Let me think about that… Have we flushed the ‘capital’ down the toilet, or simply transferred it?
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