The End of the Incessant U.S. Bid?

By Kevin Muir

It’s not getting much airplay, but on Friday, a rather important factor to the incessant U.S. financial asset bid expired.

According to Bloomberg’s Brian Chappatta, Friday was the last day U.S. corporations could deduct pension contributions at the 2017 corporate tax rate of 35 percent and will now only be eligible for the new 21 percent rate.

There has been considerable debate amongst the fixed-income community regarding the amount of curve flattening that has been the direct result of corporations accelerating their pension contributions. In fact, Brian’s article is named, “The Yield Curve’s Day of Reckoning is Overblown” and is mostly a rebuke of the idea that this factor has been the driving force to the recent flattening.

Continue reading The End of the Incessant U.S. Bid?

US OIS Forward Swap Inverts For First Time Since June 2007…

By Anthony B. Sanders

…As 10Y-2Y Treasury Curve Flattens To 18.75 BPS (REAL Fed Funds Target Rate Remains NEGATIVE)

We have been watching out for the US Treasury yield curve to invert (e.g, 2-year Treasury yields greater than 10-year Treasury yields).

fedtightinv

And the US Treasury 10Y-2Y slope has flattened to 18.75 BPS.

Continue reading US OIS Forward Swap Inverts For First Time Since June 2007…

A Different Look at the US Yield Curve

By Steve Saville

The US yield curve, as indicated by the spread between the 10-year and 2-year T-Note yields, made a new 10-year extreme over the past fortnight, meaning that it recently became the ‘flattest’ it has been in more than 10 years. While this may indicate that the boom is nearing its end, it definitely indicates that the transition from boom to bust has not yet begun.

As explained numerous times in the past, the ‘flattening’ of the yield curve (short-term interest rates rising relative to long-term interest rates) is a characteristic of a monetary-inflation-fueled economic boom. It doesn’t matter how flat the yield curve becomes or even if it becomes inverted, the signal that the boom has ended and that a bust encompassing a recession is about to begin is the reversal of the curve’s major trend from flattening to steepening. To put it another way, the signal that the proverbial chickens are coming home to roost is short-term interest rates peaking RELATIVE TO long-term interest rates and then beginning to decline relative to long-term interest rates. This generally will happen well before the Fed sees a problem and begins to cut its targeted short-term interest rate.

The following chart highlights the last two major reversals of the US yield curve from flattening to steepening. These reversals were confirmed about 6 months prior to the recessions that began in March-2001 and December-2007.

The fact that the yield curve is still hitting new extremes in terms of ‘flatness’ suggests that the next US recession will not begin before 2019.

yieldcurve_060818

Continue reading A Different Look at the US Yield Curve

Yield Curve Apologists

By Kevin Muir

I am sure many of you are sick of my yield curve talk. I have been babbling about the curve for far too long. I guess it’s a little understandable as I believe a steepener position will be “the” trade during the next crisis.

Yet there can be no denying that so far, I am wrong and the yield curve keeps going down faster than the plate of drinks at the end of David Hasselhoff’s table after a taping of Britain’s Got Talent.

It’s not an expensive position to carry, so it’s not like I am bleeding profusely from the position, but there can no denying the call has been a dud.

Continue reading Yield Curve Apologists

From Inflation Hysteria to Curve Crazy

By Jeffrey Snider

One soft indication of how far things have gone is Bloomberg. Six or eight months ago, its newsfeed was filled with uniformly apocalyptic hyperbole over inflation. The tight labor market, according to the Federal Reserve, was going to lead to a faster and farther rate trajectory. Sparked by quickening confidence in the short part of the curve, there was just no way the long end could resist.

Then it did.

Such inflation hysteria has almost entirely subsided. Yield curve flattening will do that. Even those who never pay attention to curves are suddenly gripped by them. One has inverted already (eurodollar futures), at the very least sparking a global conversation rather than BOND ROUT!!!! where no discussion would have been necessary.

For places like Bloomberg, the one-sided hysteria has been replaced by near schizophrenia. Take individual stories whichever way, my view is more of a big data type perspective. They sound much less confident over there these days. Economists and Federal Reserve central bankers can ignore curves at their leisure, but Bloomberg has to cater to people in the markets who might wish they could but in reality cannot.

In other words, unlike for Jay Powell’s assessments there has to be some grounded basis.

Continue reading From Inflation Hysteria to Curve Crazy

Inversion Alert! Treasury Slope Plummeting Towards 0 BPS

By Anthony B. Sanders

Corporate Debt To GDP May Be At Credit Cycle High

One of the effects of The Federal Reserve’s zero interest policy (ZIRP) was the massive expansion of both consumer and corporate debt. The US may be at a credit cycle peak (Corporate Debt-to-GDP).

corporate debt to gdp 2

Which brings me to the UST 10Y-2Y slope, plummeting towards inversion (now at 24.5 BPS). The last time we saw the 10Y-2Y slope so flat was in early August 2007, 4 months before The Great Recession began.

Continue reading Inversion Alert! Treasury Slope Plummeting Towards 0 BPS

US Yield Curve Continues Flattening To 26.4 BPS…

By Anthony B. Sanders

…As Net Shorts in 10-year Treasury Futures Hit Record Levels

It is difficult to predict how the trade scuffles between the US, China and Europe will play out.

But what we do know is that the US Treasury 10Y-2Y slope continues flattening, now down to 26.4 basis points.

yc102today

Meanwhile, net shorts in 10-year Treasury futures positions hit record levels. Net short positions on the 10-year future rose to more than half a million contracts in the week ended July 3, according to the latest data from the Commodity Futures Trading Commission. These positions were built as the 10-year Treasury yield fell to around 2.83 percent on July 3, and it’s currently around 2.86 percent.

Continue reading US Yield Curve Continues Flattening To 26.4 BPS…

Why the Yield Curve Changes Direction Ahead of a Recession

By Steve Saville

Conventional wisdom is that an inversion of the yield curve (short-term interest rates moving above long-term interest rates) signals that a recession is coming, but this is only true to the extent that a recession is always coming. A reversal in the yield curve from flattening to steepening is a far more useful signal.

What a yield curve inversion actually means is that the interest-rate situation has become extreme, but there is no telling how extreme it will become before the eventual breaking point is reached. Furthermore, although there was a yield-curve inversion prior to at least the past seven US recessions, Japan’s most recent recessions were not preceded by inverted yield curves and there is no guarantee that short-term interest rates will rise by enough relative to long-term interest rates to cause the yield curve to become inverted prior to the next US recession. In fact, a good argument can be made that due to the extraordinary monetary policy of the past several years the start of the next US recession will NOT be preceded by a yield curve inversion.

Previous US yield curve inversions have happened up to 18 months prior to the start of a recession, and as mentioned above it’s possible that there will be no yield curve inversion before the next recession. Therefore, we wouldn’t want to be depending on a yield curve inversion for a timely warning about the next recession or financial crisis. However, the yield curve can provide us with a much better, albeit still imperfect, recession/crisis warning in the form of a confirmed trend reversal from flattening to steepening. This was discussed in numerous TSI commentaries over the years and was also covered in a blog post last December.

Continue reading Why the Yield Curve Changes Direction Ahead of a Recession

Treasury 10Y-2Y Slope Flattens To 35.5 BPS…

By Anthony B. Sanders

…Eurodollar 3M Futures Spread Falls To Lowest Level Since 2000 (Europe’s Troubles In One Chart)

The US Treasury 10Y-2Y slope keeps falling … as The Fed keeps raising their target rate. It has flattened to 35.5 basis points.

102fedinv.png

Meanwhile, the 3 month Eurodollar spread to  the lowest level since 2000.

Continue reading Treasury 10Y-2Y Slope Flattens To 35.5 BPS…