When the yield curve inverted late last year, some commentors claimed that the media made too big a deal of the 2 year bond yield slipping over the 10 year. We’ve had numerous commentaries on the subject (but especially note these two December posts here and here).

Hmmmm, if everyomne made too big a deal about the 2/10 inversion last year, I wonder what these people think about Wednesday’s inversion of the 3 month/10 year bonds? I noticed an utter lack of response by the media or investors.

Here’s an excerpt from a well buried WSJ article on the subject:
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Yield_20060118_wsj
"For the first time in more than five years, the yield on three-month Treasury securities ended the trading day above 10-year yields, a reversal of their traditional relationship. The phenomenon is known as an inversion of the yield curve, which has often signaled economic downturns."

. . . In late trading [Wednesday], the yield on the three-month Treasury bill stood at 4.356%. The 10-year note gained 1/32, or 31 cents for each $1,000 in face value, to yield 4.336% — or 0.02 percentage points less than the 3-month bill. The 30-year bond gained 1/32 to yield 4.515%.

The flip in three-month and 10-year rates is significant because some analysts and economists see it as a more reliable indicator of future economic activity than other measures of the yield curve, such as the difference between two-year and 10-year yields . . .

The Federal Reserve Bank of New York, for example, used the difference between three-month and 10-year rates to build a model of the historical relationship between the yield curve and recessions. According to that model, the present level of interest rates suggests about a 25% probability of recession within the next year. Since 1960, recessions have always followed sustained inversions of greater than 0.12 percentage points. In early trading yesterday, the three-month yield rose as much as 0.05 percentage points above the 10-year."

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Complacency, anyone?

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Source:
Bond Market Cranks Up Alarm But Many Investors Just Shrug
MARK WHITEHOUSE
THE WALL STREET JOURNAL, January 19, 2006; Page C6
http://online.wsj.com/article/SB113759944260549757.html

Category: Economy, Fixed Income/Interest Rates

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

6 Responses to “Inversion Redux”

  1. Emmanuel says:

    Not complacency, but perhaps a Wall Street conspiracy to keep nervous investors in place while stock indices head south. They’re all down quite a bit right now thanks to the Osama and Ahmadinejad show.

    Such a conspiracy theorist am I. Cash out before it’s too late. The only time this bear will come out of hibernation and consider investing is when they start offering al-Jazeera stock .

  2. SINGER says:

    The 3 mo to 10 YR spread WAS the saving grace of those who proclaimed that the 2 yr to 10 yr was not that bad and not the main issue …. There is nowhere
    to hide now it seems…

    PS Ritholtzs’ Blog is the BOMB

  3. TonytheTiger says:

    This is just delaying the process, the market still has more upside to go. This might eventually manifest itself into a long drawn out channel. Where the SP trades within a tight range for several months. However, the point gain yesterday seemed strong, and the point losses…so far, appear to be anemic. The SP has already run its course, as of 12:00. Still, four more hours of trading, where else can it go. Either back up, or bounce around for four hours. If the SP doesn’t reverse today with that long bar down, this could spell trouble for the bulls short term

  4. Rusty says:

    Actually, the new hiding places are in the duration of the inversion, the degree of inversion, and the overall level of rates. You’ll be hearing a lot about how the inversion needs to be sustained for 90 days, needs to be at least .12 for the entire period, and even then, it’s no big deal, because we’re not talking about two rates that are north of 8%.

    These are the new positions that are being taken up.

  5. Abobtrader says:

    Oil prices, high commodity prices in general, question marks over the US housing market and other geopolitical factors all suggest a US recession cannot be ruled out.

    However, inverted curves are more of a wider global phenomenon, not just US specific. In the UK, pension funds are buying up long-term paper like there is no tomorrow, and this is pushing yields down. Along with asian central banks recycling their reserves back to the US, pension fund buying may help to explain why yields are so depressed. If it is indeed bond market specific demand/supply factors at play here, maybe an inverted curve isn’t a pre-cursor to a recession.

    I wonder if the optimists put forward similar arguments during prior inversions?

  6. amadeus says:

    in their book a recession is no big deal either…

    there’s the mild variety…

    and you also have the moderate kind…

    which rarely dips to deep…

    or severe…

    like the dreaded D word – depression…

    like 1929…

    “The economy began to expand again in 1933 and continued to do so until May of 1937. At that point, a second depression began and lasted until June of 1938.

    The United States entered World War II in December of 1941, the year generally considered to be the end of the Great Depression. Federal outlays skyrocketed as the country geared up for war. This Keynesian-style boost to the economy seems to have brought the depression to an end.”

    today a string of neo-con Keynesian-style boosts have been in play since the Cheney’s secretive energy task force meetings…

    we’ve had two quick wars since 2000 and a third on the near horizon…

    iran is now the new iraq like menace…

    big oil wars no less…

    15 usa military bases lining the long proposed trans-afghan pipeline…

    the northern and southern oil basins in iraq seem secured for big oil…

    that’s because peak oil is now in full resource war mode…

    colombia is still in its long lasting internal war mode thanks to our skulls & bones play for endless cocaine prohibition…

    ecuador is in crisis play too…

    bolivia’s natural gas mega basin is a must have…

    venezula is beefing up its military to protect the mother lode…

    praise be bush the saudi are in bed with him…

    iran is facing our mighty war machine next…

    and russia and its former republics are the greatest long-term prize…

    what a stupid way to drive the pistons of a “must grow to survive” economy…

    until major hemp seed biodiesel and corn ethanol industries compose the energy indices expect the irrationalities of the peak oil scenario to continue dominating global trends…

    in other words increased volatility and asset bubble strings…

    silver and gold are finally showing themselves against fiat paper after two decades of constant short-sales price manipulation by the chosen ones, their big investment banksters, and the entire gold production industry…

    expect this new asset bubble also to redraw public interest into another engineered wash out..

    but the biggest question, really the granddaddy ultra-trillion dollar question of all time, is how the swaps market is going to digest prolonged deflation seasoned with stagflation spikes???

    these herds of elephants in the room are approaching deep tar pits flanked by sheer cliffs…

    Bulls drive human nature…

    But Bears have the edge…

    a natural advantage really -

    bulls fatten grazing on fields of blossoming earnings and sweet demand…

    however

    bears are omnivores creatures, they can dine on the same fields as bulls, pick seasonal berries, raid bee hives, fish, and gorge on bull carcasses like a pack of wolves…

    LOL