I keep seeing reports that the yield curve is steepening. It isn’t. People confuse steeply rising yields with a steepening curve.
A relentless rise in US Treasury yields is underway, but the result is not a steeper yield curve. This is a “bearish flattener” not a “bearish steepener”
Steepening occurs when the difference between short- and long-term yields increases. Flattening occurs when the difference between short- and long-term yields decreases.
Direction Synopsis
- Bullish Flatterer: Falling yields but a flatter curve
- Bullish Steepener: Falling yields in a steeper sloping curve
- Bearish Steepener: Rising yields in steeper sloping curve
- Bearish Flattener: Rising yields in a flatter curve
A bearish flattener is generally a bad environment for equities but stocks bucked that normal behavior for many months.
$SPX S&P 500 Daily Chart
Here is an amusing headline from earlier today: Wall Street Declines on Middle East Conflict.
Stocks are significantly higher now.
Expect the next headline from the same place to look something like this: Wall Street Rises on Middle East Conflict.
Gold is up and the dollar is up despite gold being up. Oil is up, and stock are up. So everything appears rosy at this instant.
Treasury Yields May 2022 to October 2023
Since May of 2022, the 3-month yield rose from 0.85 percent to 5.63 percent. The curve flattened, then steeply inverted, and is now getting flatter again.
Treasury Yield Spreads January 2022 to October 2023
Inversion Flattens
- At the point of maximum inversion the 10-year to 2-year spread was -1.08 Percentage Points (PP). It’s now -0.30 PP.
- At the point of maximum inversion the 10-year to 3-month spread was -1.89 Percentage Points (PP). It’s now -0.89 PP.
- At the point of maximum inversion the 30-year to 3-month spread was -1.66 Percentage Points (PP). It’s now -0.68 PP.
This is massive flattening, not steepening. But it does represent a steep rise in yields.
Why?
This behavior seems to indicate a stagflationary environment, inflation plus a recession.
Alternatively, it represents a preference change, an increasing desire to hold shorter maturities.
It could be both.
Why hold 10-year treasuries yielding 4.8 percent when when you can get a risk-free return of 5.63 percent on 3-month treasuries?
What About Dumping?
Someone has to hold every treasury 100% of the time, so aggregate dumping is mathematically impossible.
Rather, people (in aggregate) now demand a higher yield for the added risk of buying a 10-year note.
But in return for that risk, there will be capital gains if yields at the long end decline for whatever reason.
I strongly prefer holding 10-year treasuries to the S&P 500. But you don’t have to do anything. Short-term treasuries are a buy for those seeking to avoid as much risk as possible.
Bond Bulls are Getting Crushed in a Relentless Selloff, It’s Not China
For rebuttal to the widespread belief that China is dumping Treasuries, please see Bond Bulls are Getting Crushed in a Relentless Selloff, It’s Not China
Meanwhile, Mortgage rates are at a 22-Year High and Headed Towards Eight Percent
Eight percent mortgages will further destroy the housing market. Please thank the Fed for this outcome.
For further discussion, please see How the Fed Destroyed the Housing Market and Created Inflation in Pictures
Individuals have a choice, but in aggregate there is no choice. Mathematically, someone must ride stocks and bonds to oblivion (or the stratosphere) if that is the direction.
I’ve been a bond market strategist for 30 years, I can tell you with certainty that this is a steepener, but every definition. The most important one is rising 2s/10s spread. I’m not sure what definition Mr Mish uses, but a rise in the 2s/10s spread is pure definition of a steepener.
“Steepening occurs when the difference between short- and long-term yields increases.”
2 – 10 differential went up by almost 0.8% from July, from near -1.1% to almost 0.3%. Isn’t that steepening? Yes the shape of the yield curve is flatter, but that’s because it’s “uninverting” and moving towards a steeper shape.
That’s correct. Mr Mish is quite wrong by definition. It tells me he has no experience or training in the bond market.
The yield curve is either getting flatter or it isn’t. If the curve is flattening it is by definition a bearish flattener.
“Bear Flattener – When short-term interest rates rise faster than long-term interest rates (i.e. the 2 year treasury yield rising faster than the 10 year treasury yield). We have historically witnessed bear flatteners at the onset of a Fed tightening cycle”
https://www.investopedia.com/terms/b/bearflattener.asp
By market lingo/convention, the curve is NOT getting flatter, it’s getting steeper. Steeper refers not to the visual appearance of the curve (i.e. the magnitude of the slope), but to the magnitude AND direction. By convention, we define steepening as increasing in magnitude AND direction and flattening as increasing in magnitude BUT decreasing in direction. So no, the curve is NOT flattening by market convention, it is steepening.
I don’t flatter Mish, in fact I’m sure I given him an occasional rise, that said –
Without question, this is one of the most interesting & useful threads Mish has ever posted (to me at least).
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agree, this one is very good. one thing about current bond market crash, is our nation is so much less productive than just 20 years ago. forget 50 years ago. plus we are now in hot war against russia and provoking china, and backing the apartheid state of israel in their madness……………using our treasury. we got really dumb over past 3 generations.
DON’T FORGET THE FED HAS ONLY ONE MANDATE.
but alas the worst bond market crash in history has occurred. commercial and residential real estate will follow. equities are irrational and could do anything.
i applaud the great opportunity looking forward. r/e cap rates will eventually come into the competition of bond coupon clipping.
the war mongering efforts of D and Rs will make all this get worse.
What? Congress running $2T annual deficits makes it hard to predict recessions using the yield curve as a guide?
Who would have thunk?
We’ve gone into the era Japan entered long of permanent slot growth with recession prevention at all costs. There’s plenty of liquidity already.. we live in structurally different times.
1) The markets are up b/c Nasrallah will not enter the war between Israel and Hamas.
2) Israel mopped up most terrorists. So far 900 Israelis and tourists have been assassinated near Gaza.
3) In the last few weeks Israel cleansed Iranian terrorists cells in the west bank.
4) Bibi may have been informed by Egypt about “something big” coming out of Gaza, about a day of infamy.
5) Israel called 300K reserves. Phase II might start soon.
Bibi response : fake news.
The FED’s technical staff doesn’t know a debit from a credit.
Contrary to Dr. George Selgin, all monetary savings originate within the payment’s system. There is just a shift between transaction’s deposits and gated deposits.
There is a one-for-one correspondence between demand and time deposits (as loans = deposits). As time deposits are grow, transaction’s deposits are depleted (currency notwithstanding).
The “demand for money” is the secret to Dr. Philip George’s: “The Riddle of Money Finally Solved”.
Sold “some” of the oil stocks that I bought last week. Nice run up today.
I always like to trade a portion of my portfolio. Though I remain long on the vast majority of it. That’s been working great for 3 years now and I expect that to continue for quite some time yet.
I saw a story that the US is trying to get more Venezuelan oil (roughly 350k bpd) by yearend. Don’t know how reliable the story is. But supplies are going to get a lot tighter by then. Unless the US can convince OPEC to pump more.
Got oil?
The immediate risk which I have yet to see anyone talking about is a 9/11 attack on US soil again. The fact Israel was caught off guard implies the US intelligence agencies were asleep at the wheel as well given their information sharing.
If there is an attack, it will send oil and stocks crashing and bond yields to the moon. I’d be very cautious for the rest of the year. I hope nothing happens but you gotta plan for the worst and hope for the best.
In the aftermath, the Fed will need to cut to stimulate the economy sending bonds prices to the moon.
Anything is possible. My actual needed income is very secure.
My investments, and in particular, those in oil stocks, are just gravy. So I am not worried about oil plummeting.
But thanks for the suggestion.
I find it hard to believe that Mossad, one of the best spy agencies in the world failed to miss such a massive attack.
The cynic in me says their embattled prime minister may have allowed it to go ahead to divert attention from his own misdoings and shore up his popularity because the nation will quickly fall in line behind him on a strong response in the same way America did behind Bush after 9/11 (no other way to explain his landslide reelection).
That is pretty cynical, but plausible. Even more so if the Mossad told him it was going to be another rockets-only attack.
Then they were wrong.
Rather like Pearl Harbor. The intelligence people knew the attack was about to happen, but were totally convinced it was going to be in the Philippines and maybe Wake Island.
Agreed. I suspect they didn’t know it was going to be of this magnitude until it was too late.
You can call it war insurance
not a shot in hell, netanyahu did NOT know the attack was coming. anyone with half a brain would understand why he would allow it. same with 9.11.01. just go read the project for the new amerikan century, or machiavelli. this stuff ain’t new.
Just read that one of the reasons for the US to want 350k bpd oil from Venezuela by year end is because Mexico’s newly built refinery needs the 930k bpd of Mexican oil that is currently exported to the US. Still, a net loss to the US of 580k bpd of heavy oil that refineries here use. Which could be made up with Canadian heavy oil that will be available for export sometime in 2024, once the TransMountain pipeline to the Canadian west coast is completed.
Refineries tend to be built around a specific feed stock. The Canada oil can really only be processed in a few refineries in the north. Of course, there is always the possibility of retooling a plant but that costs money and takes time.
Yellen just gave Mish the subject for a near future post.
US20Y – DET 20Y = 2%. Held to maturity might be a winner.
So you’re willing to take huge percentage losses as long as it’s on a small percent of your portfolio. Got it. Most people would go a different way but you do you.
over 20 years, there will be gains, in the short term there may be missed opportunities but either way, my money grows and that’s all that really matters.
Millennials need pictures. Use some pictures.
I’m much happier in short dated treasuries. Why take duration risk for less yield unless you are all in on lower rather than higher rates being on deck. As weird as things are I wouldn’t want to make that bet in either direction.
I have read that professional bond traders don’t buy bonds for the yield but for the underlying being discounted and then they make a lot more money selling those when they come back to par.
The auction for the 20 Year Treasury is on Oct 12, I will probably pick up a small amount for my long term portfolio. Yields are at 5%ish.
I also continue to nibble on TLT and started selling January OTM calls for additional profit. Oil stocks doing well, will probably sell more calls to rake in more profit but may wait for the oil panic from Geo-political events.
It’s starting to feel like 1979 all over again, 30 year yields were 14%….in the crash of 1987, 30 year yields were at 9%….I’ll take either one.
Choo! Choo!
So you’re expecting yields of 9% minimum and you’re also willing to lock in 5% for 20 years? Lol.
Some day when you grow up and have millions of dollars to invest, you will know exactly what I’m doing but you skipped over this statement, ” I will probably pick up a small amount for my long term portfolio.”
I think its called diversification and sector rotation. Unless you know the tops and bottoms of the sectors in the markets; Which I certainly do not it is a great way to play the Great Game with patience.
I apprecaite your posts on this blog. Keep em coming.
Scaling into or out of a position is the normal way to build up a large position. I guess you want to do what Peter Lynch did? (This is an investment history quiz).
Volcker let the money stock soar in 79. Greenspan conducted the tightest money policy since the GD in 87 (when there was contemporaneous reserves accounting).
We’re just at the 6th seasonal inflection point. And the demand for money is starting to rise (after having fallen for most of C-19).
“One man’s spending is another man’s income. When people are unsure about the future, they hoard their cash and sit on their hands. This reduces income to the next man, which likewise causes him to hoard cash and sit on his hands. This cycle repeats until the entire macro economy finds itself in a self-induced recession.”
“One man’s spending is another man’s income. When people are unsure about the future, they hoard their cash and sit on their hands. This reduces income to the next man, which likewise causes him to hoard cash and sit on his hands. This cycle repeats until the entire macro economy finds itself in a self-induced recession.”
Spencer, you are right, that’s the way it works.
An old saying is that if long-term rates ever reach 8%, then buy all you can. After the near-zero-rate policies of the past couple of decades, perhaps the more realistic target is closer to 5%.