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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

#51

Post by throw0101a »

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.

> 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?

Well, what do you do with the cash once the six month bond matures? IF a recession comes along, you'll be looking for a place for your cash in a financial environment that may be quite bad.

People go to 10Y bonds because any financial storms would have likely blown over by then. And keep in mind that the average time between inversion and a recession is 311 days. [1] And then on top of that you'll want some recovery time.

So you're looking at least 2 years before things hypothetically blow over. And US bonds only come in certain increments: 2Y may be overly optimistic, and the next jump after that is 5Y (then 10Y).

10Y may also be more liquid, so people just mostly skip 5Y.

[1] https://seekingalpha.com/article/4250934

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

#52

Post by MR4D »

This should be expected. Given rising FED rates over the last year+, as well as QT (quantitative Tightening, which undoes the QE in place for nearly a decade), these actions are - and this is key - reducing the money supply.

It is the reduction of money supply that causes deflation (and therefore lower rates). Technically, a yield curve inversion is an expectation of lower rates in the future, not necessarily lower growth.

This is actually extremely important, but widely misunderstood: You can have growth with deflation (and likewise, recession with inflation).

To make that point clear, a yield curve inversion is an expectation of interest rates, not necessarily an expectation of lower growth.

I expect this will cause all sorts of arguments, but the math is clear. I'll quote the Mises Institute [0] on this:

For instance, if the money supply increases by 5% and the quantity of goods increases by 10%, prices will fall by 5%.

[0] - https://mises.org/wire/central-banks-shouldnt-fight-deflatio...

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

#53

Post by throw0101a »

swarnie_ wrote: post #38
throw0101a wrote: post #36

It should also be noted that there is a delay between and inversion and a recession, with an average of about a year: * https://seekingalpha.com/article/4250934-yield-curve-inversi... This means it will probably occur in the middle of next year's US presidential election. :)

> next year's US presidential election. :) Any chance the US can extend its terms? An election seems to last an entire year and be one of the most toxic events possible online.

> Any chance the US can extend its terms?

Sure. Just amend the US Constitution. No biggie. :)

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

#54

Post by MR4D »

MR4D wrote: post #52

This should be expected. Given rising FED rates over the last year+, as well as QT (quantitative Tightening, which undoes the QE in place for nearly a decade), these actions are - and this is key - reducing the money supply . It is the reduction of money supply that causes deflation (and therefore lower rates). Technically, a yield curve inversion is an expectation of lower rates in the future, not necessarily lower…

I left off one clarification: it tends to be a good predictor of recessions, but is not perfect. See the inversions for the last half of the 1960's at the St. Louis Fed [0] as a counter-example.

[0] - https://fred.stlouisfed.org/graph/?g=nn5r

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

#55

Post by dragonwriter »

swarnie_ wrote: post #38
throw0101a wrote: post #36

It should also be noted that there is a delay between and inversion and a recession, with an average of about a year: * https://seekingalpha.com/article/4250934-yield-curve-inversi... This means it will probably occur in the middle of next year's US presidential election. :)

> next year's US presidential election. :) Any chance the US can extend its terms? An election seems to last an entire year and be one of the most toxic events possible online.

> Any chance the US can extend its terms?

In theory, yes, by Constitutional Amendment. In practice, before the next election? Short of an auto-coup, no.

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

#56

Post by rmah »

swarnie_ wrote: post #38
throw0101a wrote: post #36

It should also be noted that there is a delay between and inversion and a recession, with an average of about a year: * https://seekingalpha.com/article/4250934-yield-curve-inversi... This means it will probably occur in the middle of next year's US presidential election. :)

> next year's US presidential election. :) Any chance the US can extend its terms? An election seems to last an entire year and be one of the most toxic events possible online.

While technically possible, since it would require a constitutional amendment, there is no plausible scenario under which the term of the US president will be extended in the foreseeable future.

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

#57

Post by throw0101a »

MR4D wrote: post #50
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

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

Note: this graph is for 10Y1Y, while the indicator generally talked about is 10Y3M.

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

#58

Post by rlucas »

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?

The current Bankrate benchmark 30-year is 4.17%.

That is, by historical standards, absurdly low. The likelihood that a rate drop will 1. occur, and 2. materially contribute to your financial well-being, is very low.

Part of the reason is that when rates drop, prices tend to rise.

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

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

#59

Post by vijayr02 »

smallgovt wrote: post #47
jrussino wrote: post #46

Earlier quoted context omitted.

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.

Wouldn't the larger driver be a potential fall in house prices?

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

#60

Post by smallgovt »

vijayr02 wrote: post #59
smallgovt wrote: post #47

Earlier quoted context omitted.

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.

Wouldn't the larger driver be a potential fall in house prices?

With the exception of the 2008 financial crisis, housing prices typically appreciate during times of recession, albeit more modestly. My guess is that this is primarily driven by falling mortgage rates.

"The FHFA U.S. house price index rose by an average of 7.4 percent in the year prior to a recession and prices rose an average of 2.7 percent from the start of a recession to the end" [ https://www.cnbc.com/2018/12/11/housing-could-be-an-unlikely... ]

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