Analysis:
Yield Curve Inversion 2006
Based upon data provided by the United States Department of the Treasury, the graphic below presents the yield curve as of the evening of Wednesday, January 18, 2006.
The yield data since the first trading day of 2006 is presented below.
Important to note is that the data for January 18 shows a slight yield suppression. This may be the result of equities sell-offs that occurred in the stock markets of some countries and even affected stock prices in the United States during trading for the day. Investors reducing holdings of stocks to some extent move the proceeds from sales into the safety of government debt instruments; such demand pressure pushes bond prices up, causing yields to fall as a mathematical consequence.
The broader trend in the yield structure is evident, however. The yields on short maturity Treasury instruments are rising, whereas the yields on longer term instruments are easing. Without a marked change in this trend, a full inversion of the yield curve could be seen by this Spring, pointing to the possibility of recession by the fourth quarter of the year. This would, of course, put a downturn in U.S. economy right in the time frame of the November elections, thereby placing members of the ruling party—in this case, Republicans—directly in the path of widespread voter dismay at the ultimate consequences of five years of absolute control by the party that could not manage to hold onto the federal budget surpluses, the peace and stability, or the respect for the rule of law of the last Administration.
The Dark Wraith will provide further information on the yield curve as it moves toward full inversion.
Published 1/18/2006 09:04:00 PM
<< 16 Comments Total
Just an off the cuff comment: the curve looks like a bullwhip in slow motion (with the handle on the short term end); when that 20 year tip snaps down to about 4.2% you know your ass is going to be stinging.
Good evening, Dark Wraith.
I took a look at the yield curve data this very morning, and was hoping you'd have something to say on the matter. A number of talking heads have popped up recently to explain why the current yield curve inversion does not represent the disastrous portent it has on former occasions.
One theory that has been getting a lot of play, even from our esteemed Fed Chairman, Mr. Greenback, himself, is that the extraordinary demand shown by foreign investors for the 10yr Treasury is creating an artificial dip at that point in the yield curve. Ergo, this is not a real inverison, but merely a passing anomaly.
Although no expert in these matters, this argument strikes as being especially specious, since as I understand it, the fact that foreign investors are buying 10 yr Treasuries in large quantities speaks volumes about their nervousness concerning the equity markets, and the frailty of the world's economy in general. It is a run to safety.
So their argument seems to be this: since it's only foreign investors that are getting nervous, we don't have to worry.
Isn't that a little thin?
Good evening, Mr. Goat and Mr. Shakes. I actually had planned to write separate responses, but I got going and ended up putting about everything I was thinking of saying into this one comment.
Mr. Goat, it troubles me more deeply than I can convey with mere words that exactly the same visual theme as you set forth was running through my mind as I stared at that graph after I had created it.
I was thinking in terms of the awful physics of this market's energy: the demand pressure that you, Mr. Shakes, just noted in the middle, 10-year instrument is power of market energy being transmitted into rising prices on the 10-year and related instruments. As that price differential between the intermediates and the surrounding short-terms and long-terms deepens, those intermediate-term instruments are going to be too expensive for investors to get excited about, which means those investors are going to articulate demand outward toward longer maturity debt securities. As their demand pressure moves outward, prices on the long bonds will rise, causing their yields to fall.
And the investors won't move to the short stuff for several reasons:
◊ First, the short end is more volatile, as you'll notice from the data table. Investors are trying to move to safety, not price risk.
◊ Second, if the Fed continues to jack up the short-term interest rates it can directly affect, that will cause short-term, T-bills to fall in price, causing investors in those instruments to lose money. On the other hand, if the Fed stops its anti-inflation regime, inflation expectations will begin to build into interest rates in a serious way, and that means the yields on short-term debt instruments will rise at a differentially faster pace as the expected inflation premium sets in at progressively higher levels the longer the Fed sticks its head in the sand and prints money to cover the Republicans' fiscal irresponsibility; and if that happens, the short-term yields would obviously rise, causing the prices of the instruments to fall, and the investors would be back in the same situation with which I started this bullet point.
The bottom line is this: that bullwhip is going to crack down at the tip, and any ass in its path is going to get the financial equivalent of a romantic evening with the Marquis de Sade.
And it looks to me as if the Republicans are sitting ducks, along with the sitting President, waiting for the Bullwhip of Economic Justice to rend flesh from bone in the coming year.
The Dark Wraith can just hear the sound of former Congressmen being flogged away from Capitol Hill on their way to new careers in the Right-wing think-tanks for losers and has-beens.
Speaking of being flogged, can you imagine being a director of this bank about now if the OCC starts sniffing around? A Banking Ruse.
That is one case, Mr. Goat, where the Board of Directors should ensure that the by-laws provide for a board-level SCODGS.
(Standing Committee for On-Demand Group Suicide.)
The Dark Wraith wouldn't even bother to try to convince regulators there was a perfectly innocent explanation for that guy's breach of fiduciary duty (and the board's lack of oversight).
as said before, I wish to remove the current group in power, but to what extent to my fellow countrymen do I wish for something disastrous to occur. It seems as if we need a tsunami to change peoples views on the current regime. A Cat 5 storm couldn't do it, so why will a "little" recession?
sincerely,
a black sheep among so many lambs
Good morning, Donviti.
The difference between the Category 5 hurricane and a neo-conservative recession is that, whereas the hurricane will pass and there will be no one to deny its destructive force, the neo-cons will stay around to keep blowing hot air about how it's not really a recession, it's not their fault if it is, and it's all for the betterment of the world, anyway.
Ah, yes: the other difference between a hurricane and the neo-cons' recession is that the hurricane cannot be dragged to the gallows to pay for its deeds.
The Dark Wraith dusts off the blueprints for the trap door.
for your consumption oh wise one; comments from Eugenio Aleman PH.D. (Wells Fargo)
"...the current account deficit issue is as real as the almost $3.1 billion of foreign savings ( the current accoutn deficit was close to $780 billion fromt he 4ht qtr 04 to 4th qtr o5) we need to attract every business day in order to finance such a deficit. Furthermore, disregarding the problem is not going to make it disappear, as it seems to be the position of many sectors today."
I don't know much but it seems like he is slowly bending in the negative. Surprising?
I know nothing about this guy, but it came across my desk and I found that comment interesting.
He goes on to say
Bernake "has also argued that the US current account deficit is not a serious problem b/c there is a 'worldwide savings glut' that continues to provide plenty of funds to finance it"
Man oh man, the new guy is scaring me.....
Well, Ms. Lizzy is just stopping in to say thanks for the info.
Reading all your comments, I feel like I need to speak in the third person.
Good evening, Lizzy.
Whereas the Dark Wraith frequently speaks in the third person, he finds it unnecessary for others to do so. In fact, he has noted on occasion in the past that his tendency to speak in that third person is perhaps a sign of unresolved issues involving dissociative disorders, but this may be merely symptomatic of a deeper process of alientation pervading the society at large. To this end, then, it seems that he is conveying a personal metaphor of modernity: being and person are separated, each having its role, each observing and reacting to the other, but without an integrated mode by which interpersonal relationships can be established in the completeness envisaged by humanistic and even romantic thinkers.
The Dark Wraith has thus engaged and demonstrated mastery of the academically refined and philosophically contorted circumlocution.
"...the Dark Wraith frequently speaks in the third person..." -- DW
Now I understand more fully what it means when someone uses the phrases, "He's beside himself", or, "He's not all there".
Interesting day in the markets. I thought we were going to power effortlessly through Dow 20,000 before the end of February?
Well, I guess those pundits on Bloomberg have to be wrong sometimes.
Good afternoon, Dark Wraith.
You said, This would, of course, put a downturn in U.S. economy right in the time frame of the November elections, thereby placing members of the ruling party—in this case, Republicans—directly in the path of widespread voter dismay...
If there's going to be a recession, that's the best time to have it, by golly!
That graph is pretty cool looking! Not necessarily the line, but the actual graph form and colors, appeal to me.
Good morning, Donviti.
I got caught up in the more recent articles I've published, but I wanted to revisit this thread to address our new Fed fellow's statement about a worldwide "glut" of savings.
His statement is so disingenuous that it's breathtaking. Although he doesn't come right out and say it, what he seems to be talking about is the ever-accumulating mass of U.S. dollars in foreign reserves accounts of other countries. That's his "glut," I fear.
China distorts currency exchange rates by pumping yuan out like water to maintain the cheap peg of the yuan against the dollar. That makes Chinese goods cheap here in the U.S. We then buy those goods with greenbacks, which then flow to China. China piles them up and uses them to buy the debt instruments the federal government and large corporations issue. This gives the false impression of high-octane growth here in the United States because of the so-called "gains to leverage" phenomenon. At the same time, those 24/7 yuan printing presses in China continue to propel short-term growth via the equation of exchange, MV=PQ: as long as the aggregate price level (P) on the right side of the equation cannot pace the ever-ratcheting money supply (M) on the left side, the equation maintains balance with real output (Q) advancing (provided the velocity of money, V, stays relatively constant).
The game eventually comes to a crashing halt, which I'll explain in articles I'll publish here; but to the point at hand, the "glut" of savings is nothing but ungodly levels of U.S. dollars that are piling ever higher in the central banks of other countries. That means the trade deficits we're running are the hand maiden of the glut, and those trade deficits are exactly what enables this malfeasant government to keep running massive budget deficits (since the Republicans know very well they have a ready buyer for Treasury instruments, a buyer with oodles and oodles of greenbacks).
And even though the net exports reduce the gross domestic product, the gains to leverage from the use of debt more than compensate for the depletion caused by imports exceeding exports.
Did you get all of that, Donviti?
Good.
The Dark Wraith was worried there for a minute that he'd put everybody to sleep.
Sure did get it DW!
Investors are trying to move to safety, not price risk.
Move they are...in rather illegal ways too...Frist/Delay=insider-trading scandal.
Off topic: How about that WaPo and Klein/Dobbs?
yes, I did get it and if I get it why don't more people....
(shaking head and moaning)