Hacker News Board Hacker News, browsed like a classic message board
Live data from Hacker News

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

thesoundingline.com

Post reply on HN
Print view View original

41–50 of 70 posts

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

#41

Post by [deleted] »

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.

[deleted]

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

#42

Post by kss238 »

ethn wrote: post #37

This could also be a bet that the economy is still yet to improve, as in times of good economy the coupon rate has historically dramatically increased. To extrapolate, if the investor expects the economy to peak in 5 years, he would be incentivized to allocate capital into short-term investments such as equities and short term bonds as to defer longer-term investing until those bond yields reach their peak.

If investors were putting more capital into short term bonds, wouldn't the yield of short term bonds drop, not rise?

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

#43

Post by nostromo »

wilkystyle wrote: post #24
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, i…

"almost always"

Keep in mind this signal was only discovered in 1989. So we have a forward-looking success rate of three out of three recessions predicted within a year or two.

3/3 is great, of course, but it wasn't delivered on stone tablets from Mount Sinai. The strange thing about predictive economic indicators is they often stop being predictive once popularized.

Why? For example, in 2000 and 2006/7 the Fed raised interest rates aggressively even after the inversion. However, we know that the current Fed is looking at the curve, and has become much more dovish since the inversion. So it's entirely possible that it's predictive ability will be diminished precisely because policy makers are paying attention to it.

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

#44

Post by defertoreptar »

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…

Huh, you're right that European interest rates have done nothing but go down: https://tradingeconomics.com/euro-area/interest-rate. That could explain added demand on US long term rates, but as the article pointed out, people said the exact same thing in 2006.

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

#45

Post by qzw »

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]

It really depends on the type of debt. Don't pay down your mortgage by $10k. It will probably do nothing to lower your monthly payments. Do reduce high-interest credit card debt if possible. If you don't have high interest debt, save the money in cash or cash equivalents. High yield savings accounts are paying 2.5%. Also, do everything you can to increase your liquidity and access to liquidity. Maybe open a home equity line of credit, but don't dare spend from it! In a recession, liquidity is king. During the Great Recession, Leman Bros. went under due to illiquidity more than anything else. Whereas Warren Buffet made a killing because he could come up with cash when hardly anybody else could or would. The same principle applies to economic entities of any size.

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

#46

Post by jrussino »

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?

Similarly: I'm in my early thirties with young kids. Apartment life is getting cramped and we're ready (eager) to finally buy a home. How should this prediction/speculation factor into my decision?

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

#47

Post by smallgovt »

jrussino wrote: post #46
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?

Similarly: I'm in my early thirties with young kids. Apartment life is getting cramped and we're ready (eager) to finally buy a home. How should this prediction/speculation factor into my decision?

You can see how fixed rate mortgages trend during periods of recession here: https://fred.stlouisfed.org/series/MORTGAGE30US

Using this data, you can make some guesstimates on how waiting might effect your home purchasing decision.

By my read, mortgage rates tend to decrease during a recession. However, mortgage rates are already very low, so the potential savings may not be meaningful.

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

#48

Post by drinane »

Has the yield curve ever gotten really inverted without a subsequent "bend over" recession following? ... IOW... is there a counter example where we can say well "maybe this time is a lot like this time?" ... otherwise sounds like the typical banker control clock in action. Good job monopoly man again! (I posses no knowledge of a better economic system)

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

#49

Post by sdinsn »

dawhizkid wrote: post #23

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?

Fixed mortgage rates are already historically low

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

#50

Post by MR4D »

drinane wrote: post #48

Has the yield curve ever gotten really inverted without a subsequent "bend over" recession following? ... IOW... is there a counter example where we can say well "maybe this time is a lot like this time?" ... otherwise sounds like the typical banker control clock in action. Good job monopoly man again! (I posses no knowledge of a better economic system)

Yes. 1965.

And then it bounced back and forth for the next 4-5 years before we finally had a recession in 1970.

https://fred.stlouisfed.org/graph/?g=nn5r

Post reply on HN