[smiley]

Has anyone been paying attention to the yield curve lately?

http://money.cnn.com/markets/bondcenter/?

First of all the thing is looking like a rollercoser with the 2 yr higher than the 5 and 10 yr.

But the yields have also been rising very fast in the past few weeks. It is about the biggest move that I have seen in the past years.

I'm surprised about the utter lack on media attention that this is getting. It seems to me like a very significant movement.

Anyone has any thoughts on where this might be heading in the short to medium term and why?

[strider3700]

how long has the yield curve been inverted? I saw it invert a few months ago but though that it has corrected.

[LadyRuby]

I wish I knew what this meant in terms of protecting investments. CAn inflation-protected bond funds do okay in this situation?

[smiley]

$this->bbcode_second_pass_quote('', 'h')ow long has the yield curve been inverted? I saw it invert a few months ago but though that it has corrected.

[LadyRuby]

I thought the yield curve was pretty much flat (other than that one time a month ago), but I think the inverted thing may be new (today or yesterday). I can't believe I'm actually watching and caring about something called an inverted yield curve... what PO will do to a person.

Yahoo finance bonds

$this->bbcode_second_pass_quote('', 'T')he curve remained in an inverted pose throughout & closed at the deepest inversion since 2000.

[strider3700]

inverted yield curve in and of itself doesn't mean much. It's generally viewed as an indicator of coming recession though. How that will affect your bonds I don't know.

[Seadragon]

bad time to hold intermediate and long duration bonds, is what it's telling us...

[MrBill]

Fed Funds 4.50% going to 4.75%
One year LIBOR 5.00%
UST 2yr 4.566%
UST 10yr 4.547%
UST 30yr 4.683%

Tells me that the market is concerned about inflation today, but quite sanguine about inflationary prospects in the medium to long-term. Demand for the 30 year bond may reflect continued disappointment in equity returns and life insurance companies are choosing instead to match their long term assets & liabilities via the long bond.

There is a general uneasiness amoung policy makers that the market may be discounting future risks too much and that global over liquidity is artificially compressing yields. I am not sure. I certainly do not like to take the dollar risk and the inflation risk on the long bond at these types of miserly yields. I would definately prefer to stay in the short end of the curve via a money market fund or look to rotate into defensive stocks that may outperform if the economy slows down.

[Doly]

What is a money market fund?

[MrBill]

$this->bbcode_second_pass_quote('Doly', 'W')hat is a money market fund?

[LadyRuby]

Thirst for US long bonds heralds steeper inversion

$this->bbcode_second_pass_quote('', 'A') sudden rush for 30-year bonds that hoisted up the entire Treasury market on Friday bodes well for next week's sale of $14 billion in the revived maturity -- but also hints at a deeper inversion of the yield curve.

...

"We now have a meaningful yield curve inversion," said Richard Gilhooly, fixed-income market strategist at BNP Paribas.

[rockdoc123]

MrBill

definitely out of my field of expertise but doesn't the yield curve signal impressions the investment houses have about interest rates short term and long term?

[LadyRuby]

No, inverted yield curve doesn't mean anything THIS time. Hmmm... isn't what they said last time before the recession??


June 2000

$this->bbcode_second_pass_quote('', 'I')n the old days, an inverted Treasury yield curve -- where the interest rate on long-term government bonds is lower than that on short-term bonds -- was a predictor that economic tightening was coming to an end and that Fed rates, and then bond rates, would drop in the future. Nowadays, because the government is buying back long-term bonds, the inverted yield curve merely reflects scarcity of 30-year Treasury bonds.

[MrBill]

$this->bbcode_second_pass_quote('rockdoc123', 'M')rBill

definitely out of my field of expertise but doesn't the yield curve signal impressions the investment houses have about interest rates short term and long term?

[MrBill]

For some reason I cannot access this story, but here are the headlines FYG.

$this->bbcode_second_pass_quote('', ' ')Economics

Chile - Neutral: Inflation remains under control
Critical Events Calendar - Key events for investors
Ecuador - Negative: Inflation still on an upward trend
Ecuador - Watch: Borja says debt payments are safe
European Economics for Investors - France and Spain: Profit shares in the spotlight
Global Economics - DrKW Global Surprise Indicator rises
Global Economics - Monday's key events
Mexico - Watch: More grounds for Banxico caution
The Week Ahead - Waiting for direction
US data snapshot - Payrolls rise +193K, unemployment rate falls to 4.7% from 4.9%
US Economics for Investors - Forget about neutral, the Fed is now focused on resource utilization
US market closing comment - Yield curve inverts further as more Fed tightening is priced in

[Doly]

So, can anybody explain why the yield curve is so important?

[MrBill]

$this->bbcode_second_pass_quote('Doly', 'S')o, can anybody explain why the yield curve is so important?

[LadyRuby]

Does this mean much? It doesn't sound optimistic to me.

Also, I don't understand below where they say that some economists say the yield curve is inverted because of exceptionally heavy foreign demand for U.S. notes. But then they go on to say there's a worry that foreign central banks and companies are backing away from U.S. assets. Am I an idiot or does that not make a bit of sense?

Treasury prices close mostly lower after low interest in auction

$this->bbcode_second_pass_quote('', 'T')reasury prices closed mostly lower Tuesday, pushing yields higher, after a disappointing auction of new 3-year Treasury notes that produced a record low percentage of foreign central banks and other indirect bidders.

...

The yield curve was inverted, with the yield on the 10-year note ending below the 2-year yield. The 2-year note closed 2/32 higher at 99 19/32 with a 4.596% yield.

The 30-year bond finished down 16/32 at 110 18/32 with a yield of 4.655%, after also briefly inverting against the 2-year on Monday.

Investors are divided about the significance of the inverted yield curve, which some believe signals a looming recession.

However, some economists believe that in the current economy, the yield curve is being turned upside down by exceptionally heavy foreign demand for U.S. notes.

The 3-year notes sale was 'a relative bust,' according to Action Economics. 'It looks like the larger size, cost of carry considerations, and the focus on the revived 30-year really hurt this offering.'

...

The percentage of indirect bidders was just 22%, a record low. Kevin Giddis, managing director of fixed-income at Morgan Keegan, said that, in order to have been successful, the indirect bid would have had to have been at least 30%.

Three-year notes sales typically attract a good deal of foreign demand. Due to its large size, the auction was not expected to go especially well, but the results were not expected to be quite so weak.

There are worries in the market that foreign central banks and companies, including Japanese insurer Nippon Life, may avoid this week's Treasury sale and could be backing away from U.S. assets in general.
...

Traders are looking ahead to further auctions later in the week, with $13 billion of 10-year notes to go on sale Wednesday and $14 billion in 30-year bonds Thursday.

...

[LadyRuby]

And this...

Treasury Notes May Decline for a Third Day Before 10-Year Auction Today

$this->bbcode_second_pass_quote('', '`')`I'm not interested in this week's auction,'' said Yoshiyuki Suzuki, who helps oversees about 335 billion yen ($2.8 billion) of foreign bonds at Fukoku Mutual Life Insurance Co. in Tokyo. ``I'm not investing in Treasuries because of the inverted yield curve.''

[MrBill]

Some Japanese investors, and they are the largest holders of US treasuries, are shying away from buying new US treasuries because a) they already own enough, b) they want to diversify into some euros as well, c) the BOJ is getting ready to raise real interest rates in 2006, so domestic investments will become more attractive, d) because an inverted yeild curve means they are locking up money for longer period of time for less interest, and e) because the long bond in 30-years the bond is very sensitive to any changes in inflation assumptions.

Essentially, the duration of the long bond is the same as being leveraged, a small move in short-term interest rates can affect the long end much more, which is why Greenspan et al. were confused that their short term rates hikes had not had more of an effect on the long end of the curve.

This lead commentators to conclude that the dampened effect of the rate rises on the long end of the curve was due to excess global liquidity and therefore unusually high demand for long dated bonds. This may explain what has happened, but as soon as that demand dries up, it is noticable when the US wants to borrow a record $181 billion in Q1'06 just as investors' appetite for US treasuries is waning. That can signal higher short term rates to attract fresh money. However, if you are a fund manager, why buy today, when they will be cheaper at the next auction?

One auction does not a trend make, but the emerging trend is of concern if you are managing billions of dollars in a fixed income fund. Especially, if you are Japanese and have to run US dollar/yen risk as well.