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Yield Curve Is More Inverted Than at This Point in Run-Up to Financial Crisis

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Re: Yield Curve Is More Inverted Than at This Point in Run-Up to Financial Crisis

#21

Post by nostromo »

I’m not convinced this is a recession signal, as much as it’s a reflection of the new normal for worldwide central banks.

Put the 10 year in context: in Japan and Germany and other stable countries yields are negative. So you have to pay to lend those countries money, because the central banks are pushing yields negative.

But in the US you can actually get a modest (but real) return on the ten year, so it’s quite popular. This popularity has pushed the price lower and flattened the curve.

And while recession may not be in the cards for the US in the next few years, the next ten years is a whole different story - so given the newfound dovishness of the Fed given European and Chinese weakness, it makes sense to lock in some yield in those ten year bonds now.

Re: Yield Curve Is More Inverted Than at This Point in Run-Up to Financial Crisis

#22

Post by nikkaelle »

iambateman wrote: post #13
chadash wrote: post #8

Simple explanation of what this means. Here are current yields on Treasury Bonds (expressed as an annualized rate)[0]: 1 Mo - 2.47 2 Mo - 2.47 3 Mo - 2.46 6 Mo - 2.49 1 Yr - 2.41 2 Yr - 2.26 3 Yr - 2.19 5 Yr - 2.21 7 Yr - 2.32 10 Yr - 2.43 20 Yr - 2.68 30 Yr - 2.87 In normal times, rates are higher for longer terms. This makes sense: the longer I tie up my money, the higher interest rate I'm going to want. However, r…

Thanks for this. Question: is there any rational reason an investor would invest in a 10-year bond when they could get a better interest rate on a six month bond? It seems like an inversion would result in near-zero long-term bond purchases.

NPR's "The Indicator" podcast has had a couple of good (and short) episodes about inverted yield curves. I think this is the first of them: https://www.npr.org/sections/money/2018/01/12/577710151/the-...

I highly recommend The Indicator podcast.

Re: Yield Curve Is More Inverted Than at This Point in Run-Up to Financial Crisis

#23

Post by dawhizkid »

More practically, at least for those thinking of buying a home on a standard 30-yr fixed mortgage, since it seems like the consensus among investors is that interest rates for long-term debt will fall it makes little sense to buy anytime soon if you can wait...

Or does it make sense to go with an adjustable rate mortgage instead?

Re: Yield Curve Is More Inverted Than at This Point in Run-Up to Financial Crisis

#24

Post by wilkystyle »

nostromo wrote: post #21

I’m not convinced this is a recession signal, as much as it’s a reflection of the new normal for worldwide central banks. Put the 10 year in context: in Japan and Germany and other stable countries yields are negative. So you have to pay to lend those countries money, because the central banks are pushing yields negative. But in the US you can actually get a modest (but real) return on the ten year, so it’s quite pop…

While I'm not saying you're wrong (and I'm not pretending to know enough to fully understand all the forces at play here), the article ends with the following statement that I find interesting, in light of your comment:

> Every time the yield curve inverts there is a theory about why it doesn’t matter. The stock market rallies that often follow inversions further allay fears that it really is different. In the end, it almost always ends up not being different.

Re: Yield Curve Is More Inverted Than at This Point in Run-Up to Financial Crisis

#25

Post by byset »

alehul wrote: post #12
areoform wrote: post #7

What can the average founder, employee, and person do in the face of this news? I understand that it’s scary, but what can we do to turn that fear into an actionable checklist?

If you're a founder and this genuinely does scare you: raise money. Assuming your company stays on the same trajectory, you can raise at much better terms now than when a recession hits, especially if said recession will impact your growth.

Yes, raise now and to be safe, assume that you will not be able to raise money again.

Re: Yield Curve Is More Inverted Than at This Point in Run-Up to Financial Crisis

#26

Post by byset »

lallysingh wrote: post #2

How often does it invert? Had it ever happened without a financial crisis to go with it?

Yes, it often inverts before recessions, but most recessions do not accompany financial crises. The business cycle is normal; financial crises are (or should be) abnormal.

Re: Yield Curve Is More Inverted Than at This Point in Run-Up to Financial Crisis

#27

Post by conanbatt »

rossdavidh wrote: post #10
areoform wrote: post #7

What can the average founder, employee, and person do in the face of this news? I understand that it’s scary, but what can we do to turn that fear into an actionable checklist?

For example, paying down debt would be a good idea. [sound of numerous economists jumping up and down saying this would turn prediction of recession into self-fulfilling prophecy] Also, holding off on any major new purchases like houses or new cars. [sound of foresaid economists moaning and putting their heads in their hands in despair]

> For example, paying down debt would be a good idea.

Opposite from a financial standpoint: if interests rates lower in the future you will be able to refinance.

From a job-vulnerability perspective it always lowers your risk though: better not to be very leveraged if your income can fluctuate.

Re: Yield Curve Is More Inverted Than at This Point in Run-Up to Financial Crisis

#28

Post by JamesBarney »

chadash wrote: post #8

Simple explanation of what this means. Here are current yields on Treasury Bonds (expressed as an annualized rate)[0]: 1 Mo - 2.47 2 Mo - 2.47 3 Mo - 2.46 6 Mo - 2.49 1 Yr - 2.41 2 Yr - 2.26 3 Yr - 2.19 5 Yr - 2.21 7 Yr - 2.32 10 Yr - 2.43 20 Yr - 2.68 30 Yr - 2.87 In normal times, rates are higher for longer terms. This makes sense: the longer I tie up my money, the higher interest rate I'm going to want. However, r…

Well the bond market thinks that the interest rates will be lower in the future than right now. And one reason that interest rates could drop is a recession.

Re: Yield Curve Is More Inverted Than at This Point in Run-Up to Financial Crisis

#30

Post by nickles »

nostromo wrote: post #21

I’m not convinced this is a recession signal, as much as it’s a reflection of the new normal for worldwide central banks. Put the 10 year in context: in Japan and Germany and other stable countries yields are negative. So you have to pay to lend those countries money, because the central banks are pushing yields negative. But in the US you can actually get a modest (but real) return on the ten year, so it’s quite pop…

> I’m not convinced this is a recession signal, as much as it’s a reflection of the new normal for worldwide central banks.

3m/10y curve inversion has proven to be a reasonable signal for upcoming recession in the USA for the post WW2 period [0]. If the Federal Reserve were to factor this signal into its decision making processes (as ECB and BoJ do), its predictive power would likely decline (can't recall the episode of the podcast Macro Musings at present for citation).

> Put the 10 year in context: in Japan and Germany and other stable countries yields are negative. So you have to pay to lend those countries money, because the central banks are pushing yields negative.

You can earn positive (nominal) yields on JGBs [1] and Bunds [2], so not all yields are negative.

> But in the US you can actually get a modest (but real) return on the ten year, so it’s quite popular. This popularity has pushed the price lower.

You're comparing outright duration to curve risk. These are distinct. When discussing curve inversions, you are comparing the spread between two points on a curve, precisely to eliminate any parallel shift component. In this case, the comparison is between a 3m investing period and a 10y investing period.

> And while recession may not be in the cards for the US in the next few years, ten years is a whole different story

On what basis do you assert that recession isn't possible in the US over the next few years? Fed funds futures currently imply a 63% chance of easing by the end of 2019 [3], indicating expectations of deteriorating economic conditions.

[0] https://www.frbsf.org/economic-research/publications/economi...

[1] https://www.bloomberg.com/markets/rates-bonds/government-bon...

[2] https://www.bloomberg.com/markets/rates-bonds/government-bon...

[3] https://www.cmegroup.com/trading/interest-rates/countdown-to...

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