By MN Gordon
One Ear to the Ground, One Eye to the Future
Treasury yields are attempting to say something. But what it is exactly is open to interpretation. What’s more, only the most curious care to ponder it. Like Southern California’s obligatory June Gloom, what Treasury yields may appear to be foreshadowing can be somewhat misleading.
Behold, the risk-free tide…
Are investors anticipating deflation or inflation? Are yields adjusting to some other market or external phenomenon, perhaps central bank intervention?
So far this year, and in the face of the much-ballyhooed prospect of Trumpflation, the yield on the 10-Year note has gone down. Not up. On January 1st, the 10-Year note yielded 2.44 percent. As of market close Thursday, the yield was 2.22 percent.
At first glance, it appears there’s nary a care in the world about inflation. Conjecture, says there’s an expectation that Trump will be unsuccessful at getting his spending bill through Congress. Without Trump’s fiscal stimulus, goes the thinking, the potential for inflation becomes muted.
10-year treasury note yield and 30 year t-bond yield – going the non-flationary way. In case you are wondering what the “but” is about: it’s current net speculative positioning in t-note futures, which has gone from record net short to record net long in a heartbeat – click to enlarge.
In reality, does this have anything to do with anything? What are Treasury yields really trying to say?
To be clear, contemplating Treasury yields is like a baker contemplating the microbiology of bread yeast. The proper technique is imprecise, and best garnered over time through learned experience.
We’ve found the best results for drawing an inkling from Treasury yields are obtained by putting one ear to the ground and one eye to the future. Here’s what we mean…
A Flattening Yield Curve
If you plot the interest rates of Treasuries with different maturity dates you get a graph showing something that economist and banker types call a ‘yield curve.’
For example, if you plotted three-month, two-year, five-year, and 30-year Treasury debt you’d have a yield curve that is often used as a benchmark for establishing various lending rates. More importantly, you can use the shape of the yield curve to forecast changes in economic growth.
Bad curve behavior returns – there isn’t much left of the “reflation” party – click to enlarge.
When everything’s just great with the economy, a normal yield curve, showing longer maturity Treasuries with a higher yield than shorter-term Treasuries, will appear. This reflects the potential for greater market risk, and inflation, further out into the future.
However, prior to a recession the yield curve often becomes inverted, with shorter-term yields higher than longer-term yields. Presently, the Treasury yield curve is flattening. Could it be transitioning to an inverted curve? Here we turn to FXSTREET for instruction:
“Five years ago, long-term interest rates were just about where they are now, and short-term rates were nearly as low as the overnight federal funds rate (that is to say, at zero).
“At the end of …read more
Source:: Acting Man
The post Recession Watch Fall 2017 appeared first on Junior Mining Analyst.