Advertisements

Here’s What the CRAZY INVERTED YIELD CURVE Means for You

Just ask this trader — it’s bad.
Photo: Spencer Platt/Getty Images

President Trump is distressed about the “CRAZY INVERTED YIELD CURVE,” and he doesn’t feel “clueless Jay Powell” (who, in case you have forgotten, is Trump’s own appointee to the chairmanship of the Federal Reserve) is doing enough to address it. The stock market, which fell 800 points today, looks pretty distressed too.

The “yield curve” refers to how interest rates on Treasury bonds change with the maturity of those bonds. If you’re lending money for a longer period, you can usually expect to earn a higher interest rate. When shorter-term bonds pay higher interest than longer-term bonds, that’s an inverted yield curve. This has often been a sign of an impending recession because it shows that investors expect interest rates to fall in the near future.

You may have been surprised to see headlines today saying the yield curve has inverted for the first time in over a decade, because you’ve probably seen the occasional headline over the past few months about the yield curve already being inverted. This is because it depends on which points on the curve you’ve looked at to measure inversion. A few months ago, the yield on ten-year Treasury bonds fell below the yield on a three-month Treasury bill. Today, the ten-year rate fell below the two-year yield, which is the yield-curve comparison most frequently used to forecast recessions.

Research analyst Jim Bianco summed up the difference between the two measures nicely on Twitter: “2yr/10yr measures econ strength … 3m/10yr measures Fed policy.” I will explain this distinction and why it makes sense to focus most on the two-year/ten-year measure.

Roughly, the interest rate on a long-term bond should be the average interest rate on short-term bonds that will prevail during the term of the long bond, plus a “term premium” to compensate the lender for risks associated with lending on fixed terms for a long period. The Federal Reserve controls short-term interest rates; it does not control long-term interest rates, but it does influence them by providing guidance about its future short-term interest-rate actions and sometimes by buying and selling bonds with longer maturities. In general, interest rates should be expected to fall when the economic outlook is weak, because fewer people will be interested in borrowing money.

So when the Fed has clearly telegraphed that it is about to cut short-term interest rates, it makes perfect sense that long-term bond yields would fall in anticipation of those cuts. Or if the Fed appears to be in denial about the need to cut rates sharply but is expected to figure it out sooner or later, that’s another reason long-term yields would fall. But the short-term bond yields themselves wouldn’t fall until changes to interest rates are truly imminent or have already happened. So if the president is talking about the three-month/ten-year when he’s yelling about the yield curve and the Fed on Twitter, he’s actually onto something, in that the Fed could get the three-month rate back below longer rates pretty easily if it cut interest rates more aggressively.

But the two-year yield … well, unlike the three-month yield, it should be pricing in any anticipated rate cuts to a significant extent, since a lot of them are likely to happen within the next two years. And assuming the Fed’s current cycle of rate cuts is just a limited “mid-cycle adjustment,” as Powell declared last month to Trump’s annoyance, the ten-year yield should price in the idea that rates will go back up at some point when the economy returns to strength.

Instead, the two-year yield is now higher than the ten-year yield. To Bianco’s point, this is less a sign about expected Fed behavior than about expected economic performance — investors expect the Fed to need to cut rates and then need to keep them low for a long time, which is why this is being treated as a recession indicator.

Or at least it’s being treated that way by some people.

“There are a number of factors other than the market’s expectations about the future path of interest rates that are pushing down long-term yields,” former Fed chair Janet Yellen told Fox Business Network today, which is a reason to think inversion is a “less good signal” of impending recession than it used to be.

In particular, low and even negative global interest rates and global economic uncertainties are driving investors worldwide to buy U.S. Treasury bonds, and all that buying pushes the yields down. There has also been a reduction over time in the typical size of the term premium, meaning the economic outlook doesn’t have to move as far from neutral as it used to for the yield curve to invert.

Ultimately, the yield curve is an indicator that reflects market participants’ assessments of certain fundamental conditions, including the economic outlook. It is not a fundamental indicator itself. As Ben Hart and I discussed on Monday, economic data and news events provide a mixed picture, with some numbers that continue to look strong (particularly employment data) while others indicators weaken and downside risks loom, particularly related to China. The inverted yield curve and the barfing stock market are two more data points showing that market participants are increasingly focused on those negative indicators and downside risks.

Here’s What the ‘CRAZY INVERTED YIELD CURVE’ Means for You

Promoted links by Taboola

millennials

America’s Most Socialist Generation Is Also Its Most Misanthropic

By Eric Levitz

Young adults are exceptionally distrustful of the state (and each other) — and yet, exceptionally supportive of socialism and redistribution.

jeffrey epstein

What We Know About Jeffrey Epstein’s Autopsy

By Adam K. Raymond

Epstein reportedly suffered breaks in the front of his neck that are consistent with hanging but more common in cases of homicidal strangulation.

The president has plenty of down time and no late nights, so this makes sense

Allies to Joe Biden have been floating the idea of altering the former vice president’s schedule in an effort to reduce the gaffes he has made in recent days.

The allies, growing increasingly nervous about Biden’s verbal flubs, have said it’s an approach that’s been suggested to campaign officials on the heels of the former vice president’s stumbles.

Biden has a tendency to make the blunders late in the day, his allies say, particularly after a long swing on the road, like he had last week in Iowa. They say something needs to be done to give the candidate more down time as the campaign intensifies in the fall.

“He needs to be a strong force on the campaign trail but he also has to pace himself,” said one ally who has talked to members of the campaign team and others in the broader Biden world about how to move forward.

Today Trump will venture into the half of the country he usually ignores

President Trump will venture on Thursday into New Hampshire, a state that might represent the best opportunity for him to take back territory won by Democrat Hillary Clinton in the 2016 presidential race.

But to take New Hampshire, Trump will need to expand beyond his core base of supporters and win over the sort of establishment Republicans who have resisted his charms not only in the Granite State but around the country.

The trip is a rare foray to a bluish state by Trump, who hasn’t held a rally in a state Clinton won since October, when he appeared with three Republican incumbents in southern Illinois in the run-up to the midterm elections.

The police commissioner said it’s “nothing short of a miracle” that none of the officers were killed

A gunman who opened fire on police Wednesday as they were serving a drug warrant in Philadelphia, wounding six officers and triggering a standoff that extended into the night, is in police custody, authorities said.

Philadelphia police Sgt. Eric Gripp said early Thursday morning that the man was taken into custody after an hourslong standoff with police.

The shooting began around 4:30 p.m. as officers went to a home in a north Philadelphia neighborhood of brick and stone rowhomes to serve a narcotics warrant in an operation “that went awry almost immediately,” Philadelphia Police Commissioner Richard Ross said.

Many officers “had to escape through windows and doors to get (away) from a barrage of bullets,” Ross said.

The six officers who were struck by gunfire have been released from hospitals, Gripp said.

jeffrey epstein

jeffrey epstein

Everything We Know About Jeffrey Epstein’s Death

By Chas Danner, Margaret Hartmann, and Matt Stieb

On Wednesday one of Epstein’s accusers filed a lawsuit against his estate, Ghislaine Maxwell, and several household staffers.


vision 2020

John Hickenlooper to End Presidential Bid to Run for Senate: Report

By Matt Stieb

The former Colorado governor is expected to drop out of the race Thursday, becoming the first 2020 hopeful to bail in pursuit of a Senate seat.


jeffrey epstein

Jeffrey Epstein Owned a Painting of Bill Clinton in a Blue Dress: Report

By Matt Stieb

According to a source in law enforcement, the oil painting was hanging in Epstein’s Manhattan mansion “as soon as you walked in.”


just asking questions

just asking questions

Jeffrey Epstein’s Bodyguard on His Former Boss’s Lifestyle, Cruelty, and Suicide

By M.L. Nestel

Former UFC fighter Igor Zinoviev went everywhere with Epstein. In his first interview, he says he thinks Epstein had help ending his life.


the top line

Here’s What the ‘CRAZY INVERTED YIELD CURVE’ Means for You

By Josh Barro

An unusual configuration of bond yields is not proof that we’re going into a recession. But there’s a reason the stock market is spooked.


racism

Give Me Your Tired, Your Poor, Your Huddled Masses*

By Zak Cheney-Rice

Ken Cuccinelli has a vision for immigration that privileges people who’ll enrich America. But for him and Trump, that has always meant white people.


vision 2020

Is Tom Steyer Making a Mockery Out of the DNC?

By Gabriel Debenedetti, Benjamin Hart, and Eric Levitz

Intelligencer staffers discuss whether the billionaire, who’s likely to be on stage for the third Democratic debates, is damaging the primary process.

abortion

Steve King Discusses the Sunny Side of Rape and Incest

By Ed Kilgore

The embattled old nativist opens up a new front of outrageous comments on abortion.

moscow mitch

How ‘Moscow Mitch’ Is Helping Democrats

By Adam K. Raymond

The Kentucky Democratic Party has made $500,000 on “Moscow Mitch” merch in just two weeks.


jeffrey epstein

Jeffrey Epstein’s Curious Ties to His Brother’s Real-Estate Business

By James D. Walsh

Court documents say Jeffrey had “no meaningful family ties.” But various Epstein associates cycled through a condominium owned by his brother, Mark.

Will King get primaried out of Congress before he even faces Scholten?

Statement by Dem opponent JD Scholten in IA-4 on Steve King’s rape and incest comment:

“Yet again, Steve King puts his selfish, hateful ideology above the needs of the people of Iowa’s 4th district. Excusing violence — in any way — is entirely unacceptable.”

@mmurraypolitics

vision 2020

Is Joe Biden the Democrats’ Version of Mitt Romney?

By Ed Kilgore

The comparison is tempting, but misleading.


buyer’s market

Disney’s New Star Wars Attraction Is an Early Bust. Here’s Why That Will Change.

By Josh Barro

Despite expectations of ridiculous crowds, park attendance at Disneyland this summer has been low. But Disney knows how to turn that around.


jeffrey epstein

Drone Video Provides a Look Inside Epstein’s Mysterious Island Temple

By Adam K. Raymond

It’s creepy in there.

politics

Mass Struggle Is the Only Way to Defeat White Nationalism

By Sarah Jones

Legal reforms can only do so much. Some might even prove counterproductive.


games

Dabo Swinney Is College Football’s Real Evil Villain

By Will Leitch

He’s everything wrong with college football.

Vice President Abrams?

Stacey Abrams made it official this week that she would not seek the presidency after months of speculation among Democrats, becoming one of the most prominent party leaders to pass on the 2020 race. But in an interview Tuesday night, she said she was open to being considered for the No. 2 spot by “any nominee.”

Ms. Abrams, who drew national attention during her unsuccessful run for governor of Georgia last year, said that she would focus her next year on identifying and stemming voter suppression efforts throughout the country, a major priority for her for years, instead of running for president or the Senate.

But she has remained close to the presidential race, meeting privately with several candidates and topping lists of potential vice presidents.

crime

Report: Trump Invoked in 36 Cases of Violence and Threats

By Adam K. Raymond

According to an analysis, ABC News could not find a single instance of violence or threats made in the name of Barack Obama or George W. Bush.

Biden continues to show strength in South Carolina

jeffrey epstein

The Legal Aftermath of Jeffrey Epstein’s Death: What Happens Next

By Matt Stieb

Prosecutors intend to pursue his co-conspirators, as lawyers representing his alleged victims look to dismantle his fortune.

Uh oh

Stocks open sharply lower on Wall Street following losses in Europe, bond market signals possible recession. The Dow Jones was down as much as 400 points. https://t.co/GGboxFc9ek

@AP

Looks like de Blasio’s seven hours of wandering the fair were well spent

I spoke with 100 Democrats at the Iowa State Fair. Many say it’s way too early to decide who to support but others have already picked their prized candidate:

UNDECIDED–40

BIDEN–23

WARREN-13

SANDERS–9

HARRIS–5

BUTTIGIEG–4

STEYER–3

INSLEE–1

DELANEY–1

RYAN–1https://t.co/awnfMWzYTy

@BoKnowsNews

The great negotiators strike again

Secretary Ross confirms on @CNBC that the Administration didn’t get any concessions in return for delaying some of the September 1st tariffs. He said the move was explicitly about not taking any chances on the Christmas shopping season. It wasn’t a “quid pro quo” said Ross.

@ScottWapnerCNBC

Read More

Advertisements

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.

%d bloggers like this: