Inverted Yield Curve analysis.

This is for the sages on this board. Am hoping some of you will chime in.

The inverted yield curve has often signaled a recession.

The following is a very measured talk about how things have gone in the past during these moments in history.

If you watch this talk and find errors in it, please bring them out for discussion.

Sincerely,

jan

:^)

Link to the talk?

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This is for the sages on this board

By replying I guess I can declare myself a sage… so why let go of an opportunity :slight_smile: LOL

The yield curve inversion in the past has predicted recession. However, we are in an unusual situation. The inflation expectations are messing up with the yield curve. Meaning, the current inflation is very high (hence a higher short-term rate) and the future expectation for inflation is low (hence the long-end of the interest rate curve is low). Normally the yield curve predicting recession is because the market expects lower/ negative growth in the future. In the current scenario, I think, market is not predicting lower growth, rather inflation coming down in the future is being reflected in the long-end of the curve has lower rates than the current one. This backwardation is messing up the yield curve is my view. I have seen some others also subscribe to this view.

Again, you can say, I am positive and dismiss potential signs of imminent recession, or may be others are looking for “recession” and seeing “signs” everywhere. May be the truth is between these two positions.

Lastly, I am not an “economist”, beyond 101 economy I have no knowledge on the subject and I haven’t stayed in “Holiday inn” for a very long time ( at least not in the past 10~15 years). LOL

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However, we are in an unusual situation. The inflation expectations are messing up with the yield curve. Meaning, the current inflation is very high (hence a higher short-term rate) and the future expectation for inflation is low (hence the long-end of the interest rate curve is low).

A couple/three weeks ago I paid $3.99/gal for gas. A few days ago I filled up for $3.65/gal.

Sucks for those people in California paying $5.00/gal.

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It is $5.99 not $5 in CA.

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Try $6.25+/gal in California

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If the Fed has been buying and holding short-term bonds (2-5 year) and now it’s reversing, there would be more supply of short-term bonds in the market, pushing up their rates. Just guessing.

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If the Fed has been buying and holding short-term bonds (2-5 year) and now it’s reversing, there would be more supply of short-term bonds in the market, pushing up their rates

QT, doesn’t necessarily involve selling, but rather when the existing bonds mature, Fed is not rolling up those maturing bonds, means market participants has to step in buy those bonds, and they will demand higher rates. Separately, treasury has to refinance their maturing bonds and also issue new ones to fund government (i.e., deficits), all this is done by issuing UST. Now, the higher rates is going to strain government finance and push deficits even higher. Often in the past, what this meant was government reducing its “investment” spending, thus leading reduced economic activity.

Now, the growth may be there, and we will have higher rates and some asset prices may come down, not necessarily everything.

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my bad, here it is.

https://youtu.be/ZcKwRA2JuHo

Gosh… Am sorry. Should not post while driving on Autopilot.

Lol. KIDDING🤪

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If the Fed has been buying and holding short-term bonds (2-5 year) and now it’s reversing, there would be more supply of short-term bonds in the market, pushing up their rates. Just guessing.

If the FED sold these bonds rather than let them mature, or if the Treasury continued to issue T-bills at the same rate, then rates would rise I suppose. However there’s this weird ratio, the 3-month T-bill to overnight index swap spread, that implies that demand for T-bills from money market funds is quite high right now and as such they sell at a premium, making their rates ‘artificially’ low. In this article someone claims the excess (non-FED) demand for T-bills to be in the $326bn range.

https://www.bloomberg.com/news/articles/2022-04-05/supply-st…

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A recession is generally defined as a decline in GDP for two consecutive quarters. This does not mean all companies see profits nor stock prices decline.

I’m sure someone here has a deeper data feed they could overlay and backtest but the macroeconomic headlines and specific implications vary.

2*…I haven’t stayed in “Holiday inn” for a very long time ( at least not in the past 10~15 years). LOL* "

I would NEVER book a room in a Holiday Inn.

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