Posts filed under “Fixed Income/Interest Rates”

Yield Curve Inversion

Fed_yield
Anyone else notice the brief Yield Curve Inversion this week? The 10-year yield slipped below Fed Funds rate for first time since
the last recession.

Chris Isidore of CNN Money has the details:

"The inversion early Wednesday was different than the inversion that occurred late last year and early this year, when the 10-year Treasury yield fell below the yield on shorter-term Treasury securities.

Wednesday’s inversion came as the 10-year yield fell briefly below the fed funds rate, the Fed’s short-term rate target, currently 5 percent. It was the first time that’s happened since April 2001, the last time the country was in a recession.

The 10-year yield dipped briefly below the fed funds rate Wednesday morning after a report showed a big drop in demand in April for cars, refrigerators and other big-ticket items known as durable goods.

But when a report on new home sales came in above forecasts 90 minutes later, the 10-year Treasury yield edged back above the 5 percent level."

I continue to believe an economic slowdown is in the offing as stimulus fades, and the pig moves through the python. Recession odds for 2007 keep increasing. This despite what Ben "CPI overstates Inflation" Bernanke has said:   

"But in recent comments, Fed Chairman Ben Bernanke repeated the view expressed by his predecessor Alan Greenspan that an inverted yield curve is no longer a good indicator of a recession ahead.

"In previous episodes when an inverted yield curve was followed by recession, the level of interest rates was quite high, consistent with considerable financial restraint," Bernanke said in a speech in March. "This time, both short- and long-term interest rates — in nominal and real terms — are relatively low by historical standards."

Keep in mind that inversions are not binary — i.e., inversion or not. The depth and duration of an inversion are significant and contain information. The inversion this past Wednesday was "short-lived and relatively narrow. Some of the pre-recession inversions in the past were far more pronounced." Compare this with prior inversions:

"For example the gap between the 10-year yield and the fed funds rate were inverted for nearly 11 months and the gap reached 1.5 percentage points in January 2001, just before the Fed started cutting rates.

The recession that started in late 2000 lasted until the fall of 2001.

Still, an inverted yield curve is not something that can be ignored, the experts said.

"I think it would be healthy to be concerned, given the track record of the curve being a warning sign," said Schlesinger. "It’s important not to be trapped by past patterns. But it (the inverted yield curve) does raise a question about how far the Fed has to tighten."

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Source:
Yields throw the Fed a curve
Chris Isidore
CNNMoney.com, May 24, 2006: 3:35 PM EDT
http://money.cnn.com/2006/05/24/news/economy/fed_yield_curve/index.htm

Category: Economy, Federal Reserve, Fixed Income/Interest Rates, Technical Analysis

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Existing Home Sales Data (California Real Estate: On Sale!)

Sales of existing homes surprised to the upside yesterday. But one data point does not make a trend. This is the first rise (sequential monthly change) after 5 straight months of falling Home Sales. And that’s before we examine the data.

Before you declare the end of the housing slow down, consider:

- Existing Home sales actually slipped vs. last year by -0.7%; The reported gain was over last month’s data;

- the Inventory of unsold homes soared 7 percent in March, hittting an all-time record; There are now 3.19 million existing homes for sale, or  5.5 months’ supply; That’s the largest inventory since July 1998

- Existing homes edged up 0.3% last month to a seasonally adjusted annual rate of
6.92 million units; (we know that seasonally adjusted data is not always accurate)

- Year over year, the Northeast and Midwest gained, while the previously hot housing markets in the South and the West slipped;

- median home prices are still rising, albeit nmore slowly — up 7.4% year over year, to $218,000.

Here’s a data point that has me scratching my head:  Why are there different numbers for the year-over-year changes for seasonally and not seasonally adjusted?  Was this March somehow in a different season than last year’s March? I am perplexed.

Note that data for existing home sales comes from National Association of Realtors, a group that is certainly an interested party; Of course, as a homeowner, investor, and someone with a public bearish tilt for the second half, I’m hardly objective myself (hey, I try). But this oddity — down -0.5% for the not seasonally adjusted year over year versus down -0.7% for the seasonally adjusted year over year — is beyond my comprehension.

So much for the hard data on existing sales; Today, we get New Home Sales. Recall our prior admonishments that monthly New Home Sales Data are unreliable; look instead to a moving average.

Let’s move onto some anecdotal evidence.  A friend writes:

"Flop! Wow, KB running blue light specials in California. Not surprising,
Chico area was rated one of the most overvalued markets in the country. Houses
in the $200k space.  When was the last time you saw that in California? "

 
Oak Knoll Place Live Oak, CA

Oak Knoll Place Slideshow

Here’s the sales pitch:

"Oak Knoll Place in Live Oak is located in a beautiful
community near the majestic Sutter Buttes. With easy access to Highway 99, it is
ideally located for easy access to Sacramento, Lake Tahoe, Reno and a wide
variety of recreational opportunities. Yuba City and Marysville are
approximately 10 minutes south, Chico is approximately 35 miles north and the
Gray Lodge Wildlife area is approximately 10 minutes west. Live Oak has a
quaint, small-town atmosphere with many nearby recreational water activities,
including the Feather River, Yuba River and Sacramento River. Prices starting
from the High $200′s.
"

I don’t know Live Oak, but houses like that in California are hard to imgaine . . .

More after the jump.

Sources:
Existing-Home Sales Rise Again in March
NATIONAL ASSOCIATION OF REALTORS
WASHINGTON (April 25, 2006)
http://www.realtor.org/PublicAffairsWeb.nsf/Pages/MarchEHS06?OpenDocument

Existing Home Sales  data
NATIONAL ASSOCIATION OF REALTORS
http://www.realtor.org/Research.nsf/files/REL0603EHS.pdf/$FILE/REL0603EHS.pdf

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