On a stressful day in the stock market, yield spreads are not reflecting much stress. Here is the state of the 10yr-2yr spread at yesterday’s close. It looked constructive as it was gently rising.
But today, as global markets take a good hit (off some hype out of China* no less), the 2’s are not indicating a rush to short-term liquidity instruments. Quite the contrary. While long-term yields are slightly down (30yr) to slightly up (10yr), the 2yr is up significantly more and this is not a risk ‘OFF’ structure.
This in-day stuff is noisy and has nothing to do with greater trends. That’s what we write 30 page weekend reports for; to stay on the correct trends and anticipate those that are coming. But this snapshot is not indicating financial market stress (today at least) that is commensurate with the downside in stock markets.
* And surely, the news about officials allowing shorting of Chinese stocks is not material fundamentally, but is material to knee jerking momos the world over (in the short-term at least).
Well, the knock down in the 30yr-5yr yield spread did not last long. While it has not done anything it didn’t already do before ultimately failing in October and January, it bears watching.
The nominal 10yr is down…
And the nominal 2yr is down by more…
So this spread is rising from yesterday’s close per the following…
This is stuff you won’t find on Bubble Vision or maybe in your CFA’s monthly report. But it is only critical to most markets. The state of nominal yields dropping while curves rise would be a tail wind for gold, and for the stock market? Not so much. Yet neither of these mostly opposed asset classes have reacted yet. That is because… this:
Major trends have not changed yet. Patience my friends.
The Fed’s fingerprints are all over the charts. Whether or not that is a good thing depends upon one’s point of view.
The yield curve still matters, in spite of former Fed Chairman Ben Bernanke’s 2007 assertions to the contrary. During testimony on February 14, 2007 before the Senate Banking Committee, the following interchange took place:
Fed’s policy trajectory is tied to global recovery from SoberLook. [biiwii comment: Agreed, in that there is little pressure implied on the Fed from global and ‘strong dollar’ perspectives. The pressure would come (IMO) from any desire to keep up appearances considering that ZIRP appears to the average person to be stranger and stranger given the ramping economy. Anyway, SL as usual has the grounded and sober details].
Fear not my dear bulls, help is on the way in form of a moderating yield curve. Well, from this snapshot view at least. Indicators are flying around at warp speed and if you do not love this market (speaking as a geek) then you will never love any market.
10, 5 & 2 year yields are aligned up for the yield curve today with all maturities heading down nominally.
For a visual, here is a look at the longest end (30 year) to the shorter end (5 year). Interesting to say the least, as are so many markets right now.
A declining yield curve has been one of our main reasons to support the strong economy/strong stock market (and cautious gold’s price) stance for about 1.5 years now. So, what do you think the above means? Probably just a little blip? Yes, probably… but.
Checking in on the Continuum, we see that the ‘would-be’ support zone wasn’t… or at least isn’t yet. So much for the Great Rotation pumpers of the year ago time frame.
Today’s stock market bounce was fully anticipated. But it will be in the indicators (and the TA) that we confirm its nature going forward. A lot of those indicators take place in T bond land.