Tag Archives: yield curve

The Yield Curve Is The Economy’s Canary In A Coal Mine, by Dave Kranzler

Posted on July 8, 2018 | Leave a comment

Historically, when the yield curve inverts (interest rates are lower for long maturity debt than short maturity debt) it has not been a good omen for the economy. From Dave Krantzler at investmentresearchdynamics.com:

The economy has hit a wall and is now sliding down it. I don’t care what bullish propaganda may or may not be bubbling up in the headlines from the financial media and Wall Street, the hard numbers I look at everyday show accelerating economic weakness. The fact that my view is contrary to mainstream consensus and political propaganda reinforces my conviction that my view about the economy is correct.

As an example of the ongoing underlying systemic decay and collapse conveyed by this week’s title, it was announced that General Electric would be removed from the Dow Jones Industrial Average index and replaced by Walgreen’s. GE was an original member of the index starting in 1896 and was a continuous member since  1907.

GE is an original equipment manufacturer and industrial product innovator. It’s products are used in broad array of applications at all levels of the economy globally.  It is considered a “GDP company.” GE was iconic of American innovation and economic dominance. Walgreen’s is a consumer products reseller that sells pharmaceuticals and junk. Emblematic of the entire system, GE has suffocated itself with poor management which guided the company into a cess-pool of financial leverage and hidden derivatives.

As expressed in past issues (the Short Seller’s Journal), I don’t put a lot of stock in the regional Fed economic surveys, which are heavily shaded by “hope” and “expectation” metrics that are used to inflate the overall index level. These are so-called “soft” data reports. But now even the “outlook” and “expectations” measurements are falling quickly (see last week’s Philly Fed report). The Trump “hope premium” that inflated the stock market starting in November 2016 has left the building.

Something wicked this way comes:  Notwithstanding mainstream media rationalizations to the contrary, a flattening of the yield curve always always always precedes a contraction in economic activity (aka “a recession”). Always. Don’t let anyone try to convince you otherwise. An “inverted” yield curve occurs when short term yields exceed long term yields. When the yield curve inverts, it means something wicked is going to hit the financial and economic system.

To continue reading: The Yield Curve Is The Economy’s Canary In A Coal Mine

Leave a comment

Posted in Business, Debt, Economy, Financial markets

Tagged ,

Bond Markets Really Are Signalling a Slowdown, by Lakshman Achuthan and Anirvan Banerji

Posted on December 16, 2017 | Leave a comment

Historically, a steadily flattening yield curve has a reasonably good record of predicting recessions. From Lakshman Achuthan and Anirvan Banerji at bloomberg.com:

Analysts shouldn’t dismiss the yield curve’s message just because inflation expectations have been declining in recent years. 

Exercise caution.

Photographer: Bildquelle/ullstein bild via Getty Images

When it comes to the economic outlook, the bond market is smarter than the stock market. That Wall Street adage appears to be on the money from a cyclical vantage point, with key indicators in the fixed-income markets independently corroborating slowdown signals from the Economic Cycle Research Institute’s leading indexes.

 The yield curve is widely considered to be among the most prescient indicators. That’s why its flattening this year has been troublesome for an otherwise optimistic consensus to explain away.
This hasn’t stopped optimistic analysts from dismissing the yield curve’s message on the grounds that inflation expectations have been declining in recent years, or that foreign central banks like the European Central Bank and the Bank of Japan continue to artificially suppress their bond yields, pulling down U.S. yields. We’re reminded of Sir John Templeton’s warning that “this time it’s different” are the “four most costly words in the annals of investing” — but that’s effectively what it means to simply ignore the slowdown signals emanating from the fixed-income markets.

Of course, there’s no Holy Grail in the world of forecasting, which is why we look at a wide array of leading indexes that each includes many inputs. From that vantage point, the yield curve flattening actually makes a lot of sense. Growth in ECRI’s U.S. Short Leading Index, which doesn’t include the yield curve, has been falling since early this year (top line in chart), pointing to a U.S. growth rate cycle downturn that should become evident in coming months.

 

Next, please note the separate slowdown signal coming from the difference between the yields on junk bonds and investment-grade corporate bonds — also known as the quality spread (middle line, shown inverted). It has widened in recent months because the rising default risk for junk bonds during economic slowdowns makes their yields climb faster than those of investment grade bonds, which are less likely to default.

To continue reading: Bond Markets Really Are Signalling a Slowdown

Leave a comment

Posted in Debt, Economy, Governments, History, Investing

Tagged ,

The Flattening US “Yield Curve”? NIRP Refugees Did it, by Wolf Richter

Posted on December 15, 2017 | Leave a comment

Is a flattening yield curve signalling an impending recession. From Wolf Richter at wolfstreet.com:

Sez Fitch & Yellen

US Treasury securities are doing something that is worrying a lot of folks, including Fed Chair Janet Yellen: While short-term yields are rising in line with the Fed’s hikes of its target range for the federal funds rate, longer-term yield have done the opposite: they’ve been declining. This has flattened the “yield curve” to a level not seen since before the Financial Crisis.

This chart shows the yield curve of today’s yields (red line) across the maturity spectrum against the yields of exactly a year ago, after the rate hike at the time. Note how short-term yields on the left have risen in line with the rate hikes, while toward the right of the chart, long-term yields have fallen:

When long term yields fall below shorter term yields, the curve becomes “inverted.” This has been a reliable predictor of a recession or worse. And we’re getting closer. Today, the 10-year yield closed at just 0.53 percentage points above the two-year yield. This is the narrowest spread since August 2007.

However, in her post-FOMC-meeting press conference yesterday – where this conundrum came up hard and heavy – Yellen cautioned that “correlation does not imply causation.”

An inverted yield curve these days doesn’t necessarily cause a recession, she said. An inverted yield curve is itself a product of various factors. And one of those factors is heavy buying of long-dated US Treasuries by investors in countries on which central banks have inflicted their negative-interest-rate policies – the ravaged NIRP refugees hailing from Europe and Japan.

There are a lot of them, and they’re having an increasingly large problem that is only going to get worse next year – regardless of what the ECB will or will not do.

Fitch Ratings estimates that the total amount of global negative-yielding government debt is $9.7 trillion, with Japanese government debt accounting for $5.8 trillion and European government debt for $3.9 trillion.

To continue reading: The Flattening US “Yield Curve”? NIRP Refugees Did it

Leave a comment

Posted in Debt, Financial markets

Tagged ,