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The Strangest US Treasury Yield Curve in History, What’s Going On?

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33 comments on The Strangest US Treasury Yield Curve in History, What’s Going On?

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US Treasury yield spreads from St. Louis Fed, chart by Mish. 

US Treasury Spreads

  • 3-month yield minus 1-month yield: +1.72
  • 10-year yield minus 2-year yield: -0.60 
  • 10-year yield minus 3-month yield: -1.57
  • 30-year yield minus 3-month yield: -1.37

What’s Going On?

  • The huge inversions, led by the 10-year minus 3-month yield, are a very strong recession signal.
  • The record spread between the 3-month and 1-month T-Bills is an artifact of the debt ceiling. 

Debt-Ceiling Standoff Warps Treasury Trading

The Wall Street Journal reports Debt-Ceiling Standoff Warps Treasury Trading

Investors are piling into ultrashort-term Treasury bills to avoid getting caught up in the debt-ceiling drama.

Surging demand has driven one-month T-bill prices higher, sending the yield down to 3.313% from 4.675% at the end of March. Bills maturing in three months yield 5.105%—a record incentive for lending to the government for a couple months more, according to Tradeweb data going back to 2001.

Gennadiy Goldberg, senior U.S. rates strategist at TD Securities in New York, attributes roughly 70% of the current distortion in the short-term Treasury market to issues related to the debt ceiling and the rest to uncertainty about the course of interest rates.

Meanwhile, the lack of government refunding has led to a shortage of Treasury bills, reducing supply and lifting prices. The Treasury’s checking account at the Fed, known as the Treasury General Account, recently declined below $87 billion, from $964 billion last May. Tax revenues boosted the Treasury’s coffers to $265 billion as of Wednesday, but that remains one of the lowest levels since 2021.

Will the Debt Ceiling Cause a Fiscal Crisis or Chaos? Two Competing Views

For a look at competing views, please see Will the Debt Ceiling Cause a Fiscal Crisis or Chaos? Two Competing Views

I offered this opinion, now backed up by hard contract data “Odds of default are somewhere between 0 percent and 2 percent. Yep, that would likely mean chaos.“

Credit Default Swaps Imply a Two Percent Chance the US Defaults

Despite growing fearmongering, the perceived odds of a US default are about 2 percent. 

Due to grace periods, the likelihood of a payout on a default are much lower still.

For discussion, please see Credit Default Swaps Imply a Two Percent Chance the US Defaults

This post originated at MishTalk.Com

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33 Comments
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Oldest Most Voted
worleyeoe
worleyeoe
3 years ago
I for one hope that somehow, we default & the stock market tanks along with a few other things.
The stock market has become antigravity. Housing is just ridiculously high priced.
Both of them need a good whack-a-mole.
To me a good, 1st-ever default on debt sounds like the way to go.
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Casual_Observer2020
Casual_Observer2020
3 years ago
Reply to  worleyeoe
I think even the specter of default may cause a run to cash from other assets and an economic recession like 2009. This would be a good thing on multiple fronts b/c it would force the federal government to cut spending in line with revenue. It would be painful but there would be a deflationary crash worse than 2008/20009 imo. And eventually the dollar would be trusted again b/c the US did the right thing when it counted.
We need a new way of managing spending in line with GDP the way Scandanavian countries do. The problem is too many people trust our ability to pay everything back.
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worleyeoe
worleyeoe
3 years ago
Reply to  Casual_Observer2020
Agreed. Here’s a great Visual Capitalist graphic of our $31.4T in debt. Just staggering and will grow by $2T in FY 2023 alone.
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Eighthman
Eighthman
3 years ago
As to weakening the dollar, this is exactly what I thought would happen: replace most of it with balanced mercantilism
Two nations calculate mutual trade and use local currency up to the point of balance. I understand India is offering government debt securities if other nations want to hold surplus rupees in their vostro accounts. Almost a full reserve currency
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Powderhound
Powderhound
3 years ago
I dont buy the WSJ argument. If a I’m PM for a MMF I have several viable alternatives to the 4-week bill; RRP, Fed Funds Res, etc, all earning substantially higher rates than the 4-week bill and just as secure. We also do not see the selling of the 8-week bill from these MMF. This seems like a collateral shortage similar to 2008 and the global hunt for $s. I smell deflation.
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PapaDave
PapaDave
3 years ago
So nice to see people commenting about investing rather than complaining. Love it.
To add to the discussion, regarding stocks, I am typically 70% invested, earning about 7% annually in dividends. The remaining 30% is for trading and jumps around day by day. Currently just 7% in cash.
Not interested in physical gold, but to each, their own.
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worleyeoe
worleyeoe
3 years ago
Reply to  PapaDave
I’m the total opposite. I’m 95% in brokered CD’s waiting for the market to have its moment. Probably going to be waiting much longer than I’d like. Agree on gold, but I do like the idea of buying up some silver to have if things really turn south. I’m definitely moving in the prepper direction.
Cheers!
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PapaDave
PapaDave
3 years ago
Reply to  worleyeoe
That may work out for you. Time will tell.
There are always people calling for a BIG market correction. I find their success rate on these calls is terrible. Which is why I rarely have more than 30% in cash.
Its like people who didn’t buy a house when they were 40k, 60k, 100k, 150k, 300k because prices were going to crash. Every year they hope for an even bigger crash in order to justify their lack of action.
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Casual_Observer2020
Casual_Observer2020
3 years ago
Reply to  PapaDave
Speak for yourself. The big crash happen and I got a house in 2011 at 2001 prices. The seller brought $135k to closing just so their credit wouldn’t be affected and a short sale wouldn’t officially happen.
Like you, I am 70% invested but 30% in cash/cash equivalents. This is the first time I’ve tried this in uncertain times. I sold at the tops in 2000 and 2007 and waited to invest at the bottoms in 2002 and 2009. Let’s see how it works out. I have about a 10 year time horizon before I will “need” the money.
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PapaDave
PapaDave
3 years ago
Reply to  Casual_Observer2020
I am impressed. Well done.
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Six000mileyear
Six000mileyear
3 years ago
Banks should be offering 3-month CD’s at 3.5% and then buying 3 month T-bills at 5%. It would be an easy arbitrage.
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Zardoz
Zardoz
3 years ago
Reply to  Six000mileyear
When you can get 4.5 from a savings account?
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8dots
8dots
3 years ago
There is high demand is for the 1M. The 3M is not good enough. The 3M-1M was noise until 2023. It popup to +1.72. There is less demand for the long duration relative the the 1M and the 3M. The system is injured, badly injured.
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Lisa_Hooker
Lisa_Hooker
3 years ago
Reply to  8dots
It is only a sprain.
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8dots
8dots
3 years ago
Mish, thanks.
1) The Anti backbone of the 10Y-2Y is : 1979 low and 1980 high. 1981 low was a test. It formed a very sharp inverse V shape with little space
between the 2 legs, the 1979 and 1981 lows.
2) Upon entry to the Anti the clusters formed a spitz. There are 5 rd trip to the Anti : 1988, 2000, 2006, 2019 and 2023.
3) The peaks are more than dbl the size of the Anti. There are 4 tops : 1982 a spitz, 1992 a spitz, 2003 and a test on it’s right, 2009 with 2 lower highs on its left and it’s right, a complex peak. The 2009 to 2023 wave have 5 waves smaller waves down. The longest one is 2013 to 2018.
The last wave, wave five after failing a test it collapsed.
4) It might form a trading range at the bottom before rising. It might breach the Anti for a spring. There is a lots of resistance up above.
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Lisa_Hooker
Lisa_Hooker
3 years ago
Reply to  8dots
The trumpet shakes with great discord.
An agreement broken: lifting the face to heaven:
the bloody mouth will swim with blood;
the face anointed with milk and honey lies on the ground.
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Doug78
Doug78
3 years ago
I wish Mish could give out blue marks to the valued commentators on his site. I crave the added status it would give me and it would amaze my friends and confound my enemies.
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8dots
8dots
3 years ago
Reply to  Doug78
I am your dog.
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Doug78
Doug78
3 years ago
Reply to  8dots
Are you amazed or confounded?
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Doug78
Doug78
3 years ago
Reply to  8dots
You are my huckleberry?
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8dots
8dots
3 years ago
Reply to  Doug78
No foe or friend, everybody here contribute what they can.
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Karlmarx
Karlmarx
3 years ago
The worry should not be chaos resulting from failure to raise the debt ceiling but rather how large the christmas tree of new spending attached to the bill will be. Republicans will get played like they always do and end up passing a massive bill full of more Democrat spending which will again fire up more inflation
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Zardoz
Zardoz
3 years ago
Reply to  Karlmarx
The republicans are an unhinged cult now. All they’ll do is shriek about it to get on the news.
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Lisa_Hooker
Lisa_Hooker
3 years ago
Reply to  Karlmarx
Yet another pulled pork sandwich.
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MPO45v2
MPO45v2
3 years ago
“Despite growing fearmongering, the perceived odds of a US default are about 2 percent.”
I think you underestimate the ignorant hillbillies running the house right now. They have no clue or concept of the economic chaos they would do just to “own the libs” and we’ll all pay dearly for it long term. I think the odds are way higher than 2 percent but we’ll see what happens.
I am one of those people that have huge amounts of money in T-bills and they all hit redemption in May. Basically every week in May I have huge sums of money going from US T-Bill –> cash and I have no idea what to do with it. I had hoped to perhaps buy real estate but that is overpriced in most places.
Stocks? Overpriced except for a few gems but a default would crash the market anyway even for value plays.
Bonds? Default dominoes if US treasury defaults.
Cash in bank? With the recent bank runs? Lol, heck no.
Bitcoin? Too much risk of theft/hacking.
Gold? No thanks, it pays no interest or dividends and I don’t want to hold paper gold or stuff my safe with gold bars either.
I may end up buying oil stocks in May or key tech stocks like Microsoft of Apple until this gets sorted out.
Two rules of money:
1. Don’t lose money
2. See rule 1.
Remember, all great depressions start with defaults and most people end up losing everything.
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9TIMES9
9TIMES9
3 years ago
Reply to  MPO45v2
What you should be calculating is the near term price of gold. This is
probably going to leg up to 2800k or more, while the U.S. slowly boils
off trillions in value. First world mentalities that can not phantom the
extent of which the majority of the world does on a daily basis. But of
course they will not understand it until a hundred years after it
happens. Like usual. I would elaborate but I would be wasting the
particulars of the cellular interactions of my finger muscles. This is
better than 1980,s sitcom.
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MPO45v2
MPO45v2
3 years ago
Reply to  9TIMES9
I own GDX and GDXJ, if gold pops to 2800 I will liquidate those two ETFs, I’ve been carrying them for over a decade with very poor returns. I would have been better off with bitcoin than gold during that time frame. Gold may pop with a default but it will come crashing down after everything gets sorted out.
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9TIMES9
9TIMES9
3 years ago
Reply to  MPO45v2
you should have had enough cash over those years to drop 30-100k in bitcoin. But you didn’t. Sounds lazy to me. Sorry for the offenses
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Lisa_Hooker
Lisa_Hooker
3 years ago
Reply to  9TIMES9
If you have gold coins you can run them through your fingers over and over and over again.
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RonJ
RonJ
3 years ago
Reply to  MPO45v2
“I think you underestimate the ignorant hillbillies running the house
right now. They have no clue or concept of the economic chaos they
would do just to “own the libs” and we’ll all pay dearly for it long
term. I think the odds are way higher than 2 percent but we’ll see
what happens.”
It’s a routine. The politicians game the public. People should realize by now that “safe and effective” was a marketing slogan, not a scientific fact. The Green New Deal isn’t about climate. New Deal is the key term. Central banks are talking a lot about CBDC’s. What is your social score? Roosevelt confiscated gold. Klaus Schwab wants to confiscate all assets- you will own nothing. History is full of confiscations when times got tough. Schwab’s term for it is The Great Reset.
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jhrodd
jhrodd
3 years ago
Reply to  MPO45v2
How huge? Donald Trump huge? You can have as many $250k savings accounts as you want that are all FDIC and earn 4.75% or so. You will need some beneficiaries, joint accounts, multiple banks, etc. I have 3 in one bank and 1 in another. Ten accounts wouldn’t be difficult to manage. 100 accounts would probably require professional help. If you make your prospective heirs beneficiaries it could serve double duty.
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atryingshepherd
atryingshepherd
3 years ago
Gradually, then suddenly
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9TIMES9
9TIMES9
3 years ago
What you should be calculating is the near term price of gold. This is probably going to leg up to 2800k or more, while the U.S. slowly boils off trillions in value. First world mentalities that can not phantom the extent of which the majority of the world does on a daily basis. But of course they will not understand it until a hundred years after it happens. Like usual. I would elaborate but I would be wasting the particulars of the cellular interactions of my finger muscles. This is better than 1980,s sitcom.
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