Steep Plunge in Yield Curve Spreads, Inversions and a Recession Loom

February 11, 2022

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2:30 pm

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13 comments

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Economics

Yield Curve Spreads from the Fed and Mish Calculations

Massive Bond Market Carnage

There was massive bond market carnage on Thursday as yields spiked across the board.

The chart above reflects Thursday’s move, not today’s.

Yields rose faster faster in the mid tiers than the long end so the end result was a very bearish flattening.

The 10-7 spread is zero and and briefly inverted, that is the 7-year note yielded more than the 10-year note.

The 10-5 spread is down to 9 basis points and the 5-3 spread is 12 basis points. One basis point equals 0.01 percentage points of yield.

The much-watched 10-2 spread collapsed from 58 basis points to 42 basis points meaning rates on the 2-year note rose 16 basis points more than the yield on the 10-year note.

Typically the 10-2 spread inverts before recession but there is no requirement for that to happen.

Half-Point Hike Now Expected in March

Rate hike odds courtesy of CME Fedwatch Tool.

The market now fully expects a half-point hike by the Fed at the March 16 FOMC meeting.

Expectations gyrated wildly following CPI data and Hawkish Words by St. Louis Fed President James Bullard.

“I’d like to see 100 basis points in the bag by July 1,” Bullard, a voter on monetary policy this year, said in an interview with Bloomberg News on Thursday. “I was already more hawkish but I have pulled up dramatically what I think the committee should do.”

The Fed could have and should have been hiking long ago. Now the economy is weakening and inversions loom before the Fed gets in its first hike.

If the Fed does a half-point hike in March, I expect major inversions including the 10-2, signaling recession on the horizon.

CPI Trigger

*Consumer Price Index (CPI) data from BLS, chart by Mish*

The BLS CPI report triggered the bond carnage as noted in CPI Jumps Most Since February 1982, Up at Least 0.5% 9 Out of Eleven Months.

Year-Over-Year Key Details

The all items index rose 7.5 percent for the 12 months ending January, the largest 12-month increase since the period ending February 1982.
The all items excluding food and energy index rose 6.0 percent, the largest 12-month change since the period ending August 1982.

See the link for more details and discussion.

This post originally appeared at MishTalk.Com.

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Casual_Observer2020

2 years ago

This is all very similar to the path Japan traveled. You get either inflation or recession. You can’t have growth and low inflation. Welcome to Japan circa 1990. The Nikkei peaked in 1989 and has never reached those levels since. Some will say it is only now around 9000 points from that 1989 high. But look at the chart. It has been 33 years. Currency devaluation can happen through asset values being lower for a generation or more. Japan is still going through that now. What will developed economies riddled with debt look like ? Just look to Japan as the model.

Kauaifb

2 years ago

Reply to Casual_Observer2020

Japan failed to reckon Bank’s balance sheets, the US just needs a little time exporting inflation. All will be fine…

StukiMoi

2 years ago

Reply to Casual_Observer2020

Japan has had plenty of growth since 1990. At least per capita. Even more so per working age capita. Their industry is as competitive now, as it was 30 years ago. Debt is lower than it was, almost everywhere outside of government.

The whole meme that Japan has in some ways not grown, is just nonsense spread by clueless hacks. Few have benefitted as much from the rise of Asia and China as Japanese industry has. They’re still broadly competitive, and adding value.

They do have a serious fertility problem. But even in that respect, they’re no longer any worse than the rest. Turns out they were just a generation ahead.

Compared to The West, it’s not even close. In Peronista US and increasingly Europe, people can hardly afford a roof over their heads anymore. Much less a doctor’s visit. Now even decent food is getting scarce. Companies are utterly incapable of competing in almost any field, most instead living solely off of government redistributing their way, the earnings of the dwindling few who can still compete. Pretty soon, America will live off of nothing more than raw materials like gas, and off of competitive advantages arising from nothing other than people no longer being able to afford to demand the same environmental protections that first worlders take for granted. It’s what a retarded indoctrinati is being told is “business friendly.” Just like that other Peronist country.

Westerners, like most third worlders, no longer being able to afford Japanese goods, is not due to Japan not growing.

No doubt, the BOJ have done its best to third-worldify Japan as well. It’s a central bank, after all. Turing their dominions into destitute third world hellholes is what they do. But the BOJ haven’t been able to do so nearly as thoroughly as its Western counterparts. Largely because Japan, even in the late 80s, was still mostly a country of competent, literate people who ran or worked for internationally competitive companies. Not just rank morons who can neither read nor count, yet still run around stupid enough to belive that The Fed handing them massive amounts of stolen goods, somehow make them “smart.”

IOW, even at the late 80s low point, the Japanese had something to lose by letting the country degenerate into nothing more than a US style pure theft racket, set up for the enrichment of hardly sentient idiots “making money of their home and portfolio,” as well as from forcing their betters to waste their lives being dragged into childish kangaroo court dramas.

jfpersona1

2 years ago

The Fed hasn’t hiked in – well, I have no idea how long; the last thing that was close was the ‘taper tantrum’. Isn’t a recession baked into any hike at this point?

And isn’t this the point? With inflation where it is, we’re going to need a recession to shake it out. Yesterday, I heard on the news that the current yearly inflation number is higher than it’s been going all the way back to 1982. That year was the tail end of very high inflation that finally ended with significant tightening by the Fed.

KidHorn

2 years ago

I think the yield curve changes are due to what investors predict the FED will do. Not a harbinger of economic doom. I would guess most predict the FED will raise rates for maybe a year and then start to lower them back to 0. Although there could still be economic doom, I don’t think that’s what’s driving the curve.

Robbyrob

2 years ago

Update: Supreme Court to weigh EPA authority on greenhouse pollutants

Additional briefs shed light on possible outcomes of major case scheduled for oral arguments this month.

link to yaleclimateconnections.org

TechLover1

2 years ago

fedwatch probabilities have stabilized now at around 60% chance of a 50 point hike in March. It was totally haywire yesterday.

I still believe they won’t do a 50 point hike in March unless March CPI print is over 8%. March CPI print comes in a few days before the FED decision.

Tony Bennett

2 years ago

“Sentiment continued its downward descent, reaching its worst level in a decade, falling a stunning 8.2% from last month and 19.7% from last February. The recent declines have been driven by weakening personal financial prospects, largely due to rising inflation, less confidence in the government’s economic policies, and the least favorable long term economic outlook in a decade. Importantly, the entire February decline was among households with incomes of $100,000 or more; their Sentiment Index fell by 16.1% from last month, and 27.5% from last year. The impact of higher inflation on personal finances was spontaneously cited by one-third of all consumers, with nearly half of all consumers expecting declines in their inflation adjusted incomes during the year ahead.”

link to sca.isr.umich.edu

KidHorn

2 years ago

Reply to Tony Bennett

We’re also entering tax season and much of the 2022 child tax credits were paid out last year. Many people will be in for a tax shock.

Tony Bennett

2 years ago

Reply to KidHorn

Great point!

Tony Bennett

2 years ago

Reply to Tony Bennett

I’ll add that IRS has already warned refunds will be later than normal.

Christoball

2 years ago

Reply to Tony Bennett

I was reading that it is costing the typical American family $250 a month more to run the household than it did a year ago. For Illustration purposes: In California the Median Monthly Mortgage Payment is $2,282, The Average Mortgage Balance $371,981. Now imagine adding $250 a month to this mortgage payment or almost 11% bringing the total to $2532 a month. This would make your mortgage payment as high as it would be if you had a $412,854 mortgage balance. Imagine all of a sudden having payed approximately $40,000 more for your house. This is a high housing cost state, so imagine this percentage affect being compounded in a lower housing cost state. Also Californians are probably paying more than a $250 a month increase in costs to run a household, so their numbers would be amplified. This is what many nickle and dime increases do to a family’s budget.

There are no winners with inflation, and it is tremendous drag on the economy with nothing to show for it except higher numbers. Actual productivity output is probably already at recessionary levels and only GDP numbers goosed by inflation have cloaked this effect.

Tony Bennett

2 years ago

Consumer Sentiment just crashed … from an already recessionary low level.

Prior … 67.2

Expected … 67.5

Range of “experts” … 65.0 to 69.0

Actual … 61.7

Steep Plunge in Yield Curve Spreads, Inversions and a Recession Loom

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