December 27, 2005

FLASH: Treasury yield curve inverts


"It's different this time" they'll say.

No, it's not. It never is. We just want it to be.

The yield on the benchmark 10-year Treasury fell below that of two-year notes early Tuesday, inverting the yield curve for the first time since December 2000.

Previous inversions have typically signaled a slowing economy or recession and debate has raged over what an inverted curve means in the current environment of robust growth and relatively subdued inflation.

55 comments:

ECOBUILDER said...

Anybody can explain (in simple words) why is it signalling recession?

May be the FED just wants to keep long T-notes steady for supporting a housing bubble?

keith said...

It doesn't cause the recession - it simply predicts it. Bond traders see a housing bubble, they know what it'll do to the consumer economy, and the yield curve now shows it. Pretty easy.

From the November 29th WSJ print edition (page 6):

"Bond investors, worried about slackening home sales, nudged the threat level on their economic early-warning system a notch higher yesterday.

In an unusual event known as a partial inversion of the yield curve, investors kept buying five-year Treasury notes until their yield, which reflects expectations of how the economy will fare over the next several years, fell below the yield on two-year notes, which tracks expectations of what the Federal Reserve will do with interest rates in the shorter term"

Anonymous said...

My understanding is that this signals recession because investors are willing to take smaller annual yields locked in for a long period, than larger annual yields for a short time. This is an indicator of low market confidence by both the treasury dept. and investors. The treasury dept. is lowering the yield on long term bonds because the future is uncertain, and investors are willing to take relativly weak long term bonds because they fear they will be even weaker before short term bonds that they could buy will mature.

keith said...

http://biz.yahoo.com/ap/051227/wall_street.html?.v=9

Stocks Lower As Yield Curve Inverts

Stocks Move Lower As Bond Market Gives Signs That in Past Have Signaled an Economic Slowdown

Out at the peak said...

So mortgage rates will continue to lower as the 10yr slips? What happens when foreclosures rise? Will investors demand a better rate of return for more risk?

dnally said...

The inverted yield curve can also indicate one other important future event: inflation! Short term rates are higher than long term rates because investors fear a higher inflation rate in the near term. But in the longer scheme of things the investors think inflation will come back down, and that's why the long term rate is relatively low.

keith said...

Full disclosure - I picked up a few hundres shares of GLD today at $50.60. Might pick up more this week.

When it hits the fan, I think gold will really be the only safe haven. Why have all assets in dollars when that could be trouble ahead?

It's had a good run, but a nice pullback from it's recent high of $538 an ounce hopefully is a good re-entry point

We'll look back at today's yield inversion as a very important and obvious moment.

Any thoughts?

Anonymous said...

Double Bubble...
1. Real Estate
2. Yield Curve

skytrekker said...

bought into a gold mutual fund GOLDX Gabelli gold-glad I did now.

Dogcrap Green said...

I don't have the readers you have. I guess the key in getting is to pound the table saying the sky is falling. Any ways I have always said on my bog that rates won't rise despite the action of the man behind the curtain.

It seems to me the man that predicted this should have his opinion carry more weight than the army that is chasing the news.

The surge in the dollar is prompting the purchase of the 10 year note. The increasing in demand f the ten year note is slaming the returns on them into the ground.

Look at the profits Europeans will make on the 10 year note even if the rate drops to 3%. We are still talking double digit rate of returns for them!!!!!

On to more important things. Will ASU win tonight?

41cadillac said...

Housing Exec: There's No Bubble

POSTED: 12:22 pm EST December 27, 2005
UPDATED: 12:33 pm EST December 27, 2005

NEW YORK -- The head of one of the nation's largest home ownership service providers said Tuesday that home sales may slow down next year as supply catches up with demand.

But HomeServices of America president and CEO Ron Peltier said there is no real estate bubble.

Peltier acknowledged in an interview with CNBC that some markets -- such as Las Vegas, Miami, New York and southern California -- are "overheated."

But he said prices in most markets should rise in the low single digits in 2006.

Those markets, he said, include Atlanta, northern Florida, North Carolina, Cincinnati and Minneapolis.

Anonymous said...

It is called THE BIG LIE: ie there is no bubble (Real Estate lobby) or Bernanke saying, "What Bubble"?

The problems as I see it is the "cute crowd" has determined that debt debt and MORE debt is GOOD! Deficits both personal and public are GOOD! There are people making millions off of others accumulation of debt! AND the crowd going into debt is the MIDDLE AND LOWER CLASSES!

Quite simply, if the population at large no longer has the earning power through good pay, you give them CREDIT CREDIT and MORE CREDIT to fill the gap! The FED has squeezed debt out of just about everything but underwear!

Just look at the MASSIVE level of personal debt! It is staggering!

Combine this with the current bout of globalization resulting in sinking wages for many many people. Remember the federal labor statistics drop off the underemployed and those who gave up! As I travel across this country I see dead citys everywhere (ie Sandusky, Buffalo, Gary, Duluth, Detroit, Cleveland, and many many many dead towns like Clinton, Iowa, East St. Louis, Decatur, Lebannon, Pa, etc. etc.) The whole China competition thing is DEFLATIONARY........ not inflationary! It only approaches inflation when you pour on the debt and the public is full of DEBT. Now put on the FED tightening and the new bankrupcy laws and you get the brew cooking for big economic trouble.

REMEMBER: THIS YEAR WAS THE FIRST YEAR SINCE THE GREAT DEPRESSION WHERE WHERE THERE IS NEGATIVE SAVINGS!!!!!

In this environment the only thing left for real estate to do is COLLAPSE!

The problem is that with globalization, all fall back economic positions will have evaporated outside of a massive WAR!

keith said...

ya know folks, you might not guess it based on the content of this blog, but I'm actually an optimist. I like to look ahead, and I think things will always be better.

However, we're in a period right now where I feel we're heading the wrong direction. I'm optimistic we can find the way back, but I know for certain there will be some pretty bad stuff short term that is now necessary for us to get back on track.

1) We need to get away from debt - the government and the people. The only way to do this is for people to become disgusted with debt.

2) We need to get back to the mean on housing - where rents = payments, where first time buyers can buy based on their income without exotic mortgages, and where housing increases at the rate of inflation, with no speculation. We need a significant crash to get us back to where we need to be - and to make sure speculators don't ever look to housing again.

3)We need a fed that understands that doing the easy thing leads down the road to more pain than if they would have taken their medicine. No more easy credit. No more knee-jerk reactions. And no more damn biggest bubbles ever.

4) We need leadership in DC on both sides of the aisle that understand how to make tough decisions for the good of the country, vs. easy decisions for the good of themselves. Pensions, Social Security, Medicare, Medicaid, Health Care, Foreign Affairs, Tax Policy and the Budget.

I believe the bursting of the buble will cause significant pain and devastation. But after it's over, we'll be better off than we are today.

Best of luck out there.

Keith

keith said...

REAL ESTATE HOLDS THE KEY

The real estate sector will be key in determining whether the bond market is truly scenting a slowdown sometime in 2006, analysts said.

Rising house prices have sustained economic growth over the last five years, as low interest rates in the wake of a shallow recession in 2001 led homeowners to unlock the rising value of their homes and pump up their spending.

One sign the housing market is cooling was seen Friday when data from the Commerce Department showed new home sales fell 11.3 percent in November.

"There have been some signs that housing has slowed. I think if you get a month or two of (weak) numbers, then people would start jumping on the bandwagon," the primary-dealer trader said about the prospect of curve inversion signaling slower growth.

Anonymous said...

The “BIG LIE”!

Massive amounts of liquidity have been the primary reason for the “conundrum”, and now it’s the most likely cause for the inversion of the yield curve. The liquidity comes mainly from the Japanese and Chinese who buy our treasuries without regard to price as a way to keep interest rates depressed and the US Consumer spending.

It’s a big circle of funny money.

The US Consumer tapes his HELOC due to attractive rates and the wealth effect. Then the US Consumer spends his/her new found funny money on new Japanese cars, and Chinese made I-pods.

Btw, I absolutely love my new I-pod. 30g - video ... love it!

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