[shakespear1]

For the novices of Finance in this forum this may be of interest

$this->bbcode_second_pass_code('', ' DEBT MARKETS DEMYSTIFIED

This week the U.S. Treasury is set to undertake a very large and onerous quarterly refunding with the re-introduction of the 30 year or “long bond.” Treasury debt to be auctioned is as follows:
Tuesday Feb 7 21 billion 3 year notes
Wednesday Feb 8 13 billion 10 year notes
Thursday Feb 9 14 billion reintroduction of the long bond [30 yr.]')

Article

[LadyRuby]

$this->bbcode_second_pass_quote('LadyRuby', 'A')nd 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.''

[LadyRuby]

It looks like the yield curve is much more inverted now. For anyone who knows about this, does this mean anything?

Rates and Bonds - Yield Curve

[MrBill]

$this->bbcode_second_pass_quote('LadyRuby', 'I')t looks like the yield curve is much more inverted now. For anyone who knows about this, does this mean anything?

Rates and Bonds - Yield Curve

[LadyRuby]

Head over heels in trouble - Bond market yield curve hints at danger

$this->bbcode_second_pass_quote('', 'A')ll the twists and turns of the stock market can’t match what’s happening in the bond market. It’s flipping upside down.

A topsy-turvy bond market spells bad news for stocks. More important, it threatens the economy. Millions of paychecks could be in jeopardy.

The last time the bond market tumbled head over heels was in April 2000. The stock market began a 3-year bear run and we landed in a recession that cost 2.7 million Americans their jobs.

It had happened before.

A Merrill Lynch economist has matched overturned bond markets with recessions in 1991 when 1.6 million people lost work, in 1981 when 2.8 million lost their jobs, in 1980 when 1.1 million lost jobs, in 1974 when 2.2 million lost jobs, and in 1970 when 1 million lost jobs.

You can see why economists are talking about the bond market and why the rest of us should be listening. In the economists’ words, what’s happening is that the yield curve is beginning to invert.

...

We have two things working in our favor.

First, the yield curve has only gone flat. It hasn’t completely tipped over as it did ahead of the last six recessions.

But expectations are high that the Fed will raise short-term interest rates again at its March 28 meeting. That would put more pressure on the curve to invert.

Second, there was one time the bond market flipped and we didn’t hit the wall.

It was June 1998, and the economy and job market chugged along just fine.

Maybe we’ll draw that hand as the cards are dealt.

Personally, I don’t like the odds.

[MrBill]

$this->bbcode_second_pass_quote('LadyRuby', '[')url=http://www.kansascity.com/mld/kansascitystar/business/personal_finance/13833285.htm]Head over heels in trouble - Bond market yield curve hints at danger[/url]

$this->bbcode_second_pass_quote('', 'A')ll the twists and turns of the stock market can’t match what’s happening in the bond market. It’s flipping upside down.

A topsy-turvy bond market spells bad news for stocks. More important, it threatens the economy. Millions of paychecks could be in jeopardy.

The last time the bond market tumbled head over heels was in April 2000. The stock market began a 3-year bear run and we landed in a recession that cost 2.7 million Americans their jobs.

It had happened before.

A Merrill Lynch economist has matched overturned bond markets with recessions in 1991 when 1.6 million people lost work, in 1981 when 2.8 million lost their jobs, in 1980 when 1.1 million lost jobs, in 1974 when 2.2 million lost jobs, and in 1970 when 1 million lost jobs.

You can see why economists are talking about the bond market and why the rest of us should be listening. In the economists’ words, what’s happening is that the yield curve is beginning to invert.

...

We have two things working in our favor.

First, the yield curve has only gone flat. It hasn’t completely tipped over as it did ahead of the last six recessions.

But expectations are high that the Fed will raise short-term interest rates again at its March 28 meeting. That would put more pressure on the curve to invert.

Second, there was one time the bond market flipped and we didn’t hit the wall.

It was June 1998, and the economy and job market chugged along just fine.

Maybe we’ll draw that hand as the cards are dealt.

Personally, I don’t like the odds.

[LadyRuby]

Now THAT's what I call an inverted curve. Looks like Mt. Fuji!

CNN Money Bondcenter

[MrBill]

$this->bbcode_second_pass_quote('LadyRuby', 'N')ow THAT's what I call an inverted curve. Looks like Mt. Fuji!

CNN Money Bondcenter

[LadyRuby]

And then there's something like this. Economic predictions by 75 or so economists for what the market will "look like" in 2006 (from the end of 2005).

Business Week: Fearless Forecasters

The "market concensus" was that the dow would end 2006 at 11,556 (compared to approx. 10,800 at end of 2005). Only 7 predicted the dow at the end of 2006 would be lower than 2005.

Makes you wonder if you're off you're rocker.

[MrBill]

$this->bbcode_second_pass_quote('LadyRuby', 'A')nd then there's something like this. Economic predictions by 75 or so economists for what the market will "look like" in 2006 (from the end of 2005).

Business Week: Fearless Forecasters

The "market concensus" was that the dow would end 2006 at 11,556 (compared to approx. 10,800 at end of 2005). Only 7 predicted the dow at the end of 2006 would be lower than 2005.

Makes you wonder if you're off you're rocker.

[LadyRuby]

$this->bbcode_second_pass_quote('MrBill', 'D')on't be too cruel. Most journalists have to write an article whether they have anything to say or not. The same as with analysts. Either say the same as everyone else or take a risk and make outrageous predictions. That is why you will often see what I call J curve predictions from these experts. These predictions state that the underlying trend goes a bit further, followed by a regression to the mean. i.e. things are bad this year, but we forecast growth next year. It is a very safe prediction.

[rogerhb]

$this->bbcode_second_pass_quote('LadyRuby', 'B')ut still... it makes me wonder if I'm being a total flake seeing a recession coming.

[MrBill]

$this->bbcode_second_pass_quote('LadyRuby', '')$this->bbcode_second_pass_quote('MrBill', 'D')on't be too cruel. Most journalists have to write an article whether they have anything to say or not. The same as with analysts. Either say the same as everyone else or take a risk and make outrageous predictions. That is why you will often see what I call J curve predictions from these experts. These predictions state that the underlying trend goes a bit further, followed by a regression to the mean. i.e. things are bad this year, but we forecast growth next year. It is a very safe prediction.

[LadyRuby]

All is rosy rosy rosy....

U.S. Economy Grows at a 1.6% Rate in Fourth Quarter

And yet it looks (to me, but I could be mistaken) the difference between the 3 month bill and 10 year note continues to increase, signaling a slowdown.

Is there market manipulation going on, people wanting to insist that our economy is booming, booming I tell you! And maybe it is, but can people continue ignoring these other indicators? Maybe it's because so far the yield curve hasn't been inverted for a very long time.

[LadyRuby]

And another view from Bloomberg...

All the Letters Spell S-L-O-W-D-O-W-N

$this->bbcode_second_pass_quote('', 'O')ne day it's strong. The next day it's weak. At least that's the view from the front row.

Seen from a comfortable distance, the $11.3 trillion U.S. economy doesn't change course that quickly. The noise eventually floats to the surface, leaving behind a clear, solid trend.

With the bond market, not to mention the Federal Reserve, hungry for good intelligence, it may be an appropriate time to take the economy's temperature.

After a sharp deceleration in fourth-quarter real gross domestic product growth to 1.6 percent, the consensus marked up its first-quarter forecast to something on the order of 4 percent or 4.5 percent, with outliers as high as 6 percent.

The idea that one quarter's loss is the next quarter's gain -- or the corollary, that strong growth in one quarter steals from the subsequent one -- is popular on Wall Street, if not in economics. It assumes growth is a fixed quantity, to be distributed equally among quarters at the whim of the weather and natural disasters.

Not all weather effects can be recouped. An unseasonal April blizzard might find a mismatch between consumer demand (snow- blowers) and retail supplies (spring wear). Sometimes what looks like weather can be a new trend reasserting itself.

So let's see where we are.
...
Putting it all together -- C + I + G + X - M -- what does it add up to?

Any way you slice it the letters spell ``slowdown.''

[MrBill]

Lehman Bros. upped their forecast for Fed funds to 5.5% in August/September this year from their earlier forecasts of 5.0%. Tried to post the article this weekend, but had troubles with the site timing out. In any case, as with any inverted yield curve, you have to look at both ends of it to arrive at its slope. Therefore, be careful to keep in mind 'how high' the front end gets, which is pricing in inflation expectations in the short term, to 'how low' the long end gets which may be pricing in a slowdown in the future, but not a recession if yields in the long end remain robust.

i.e.
S/T 4.50% - L/T 4.0% base scenario
S/T 5.50% - L/T 4.0% is less bearish the recession scenario as
S/T 5.00% - L/T 3.5% even though the slope of the curve is the same.
the L/T rate of 3.5% indicates more of a slowdown and therefore lower rates than a long term rate of 4.0%

[LadyRuby]

Commentary: Yield curve returning to normal

$this->bbcode_second_pass_quote('', 'D')on't look now, but the yield curve appears to be twisting back toward its normal positive slope. Now the question becomes: is this good news or bad news?

The answer: it all depends on who you are.

If you're looking to take out a fixed-rate mortgage, the recent jump in long-term interest rates to multi-year highs is clearly bad news. It's also bad news for homebuilders, or anyone looking to sell a home, for that matter.

Over the past few months, with most of the increases in interest rates at the short end of the curve, the market for new and existing homes has already begun to weaken, so you can imagine what higher long-term rates will do.

Of course, if you're in the market to buy a home, and you have the financing all lined up, you are in the driver's seat, able to strike a better deal than, let's say, this time last year. In other words -- housing's already become a buyer's market, and these recent increases in bond yields only make it more so.

...
For the banks, it's a mixed bag.

On the one hand, those institutions that have a huge mortgage department will find that it will soon get more difficult to make loans. On the other, if and as long-term rates rise above short-term rates, the pressure on their profit margins for other types of loans will ease.

As you know, the rates banks pay for their deposits are akin to those on the short end of the curve. Their loans are priced at rates found on the long end.

When the curve inverts, as it did a number of weeks ago, it squeezes the banks' profitability on a lot of the loans they make. That's why most banks prefer to operate in an environment that contains a positively-sloped yield curve, which it looks like they might get.

But the best news of all is for the economy. That's right; the jump in bond yields is actually good for the U.S. economy.

First of all, by twisting the yield curve back to a positive slope, it puts the banks back into the money-creation process, thus reducing, if not eliminating, the possibility that a recession might develop.
In the past, whenever the curve has inverted, for whatever the reason and at whatever level of interest rates, a recession has followed within months.

Second, and just as important, rising bond yields make the Federal Reserve's job of slowing the economy easier. This means that Ben Bernanke and his band of merry central bankers will not have to raise the federal funds rate as much as they might have had the curve remained inverted.

As long as bond rates continue to rise, I'll stick with my forecast of just two more quarter-point hikes to five percent.

[MrBill]

I personally think that 5% interest rates will not be too high for the US to endure. The yield curve is quite flat now at 4.72-4.77% with a couple more interest rate hikes in the pipeline. Of course, interest rates could be lower if the US would reduce its budget deficit and close some of its current account deficit.

[LadyRuby]

It looks like the yield curve is inverting again. It's very steep although not totally inverted.

Bloomberg Bonds including yield curve

Bernanke Qualifies Message in the Yield Curve

$this->bbcode_second_pass_quote('', 'F')or his third speech as Fed chairman, Bernanke chose as his topic the yield curve and its role in making monetary policy. He outlined two different scenarios, with different implications, under which the yield curve could have arrived at its current flat slope. And in terms of the conduct of monetary policy, he said it ``depends critically'' on how or why long-term rates have behaved so abnormally, refusing to rise in the face of the Fed's 14 rate increases.

Ben's Choice

Option No. 1: If low long rates are the result of a decline in the term premium -- the extra yield investors demand for the risk of holding long-term assets -- ``the effect is financially stimulative and argues for greater monetary restraint, all else being equal,'' he said.

Option No. 2: If long long-term rates reflect current or prospective economic conditions, the implications for policy may be ``quite the opposite.'' If the natural rate, or the rate consistent with full employment, has declined, the antidote would be a lower real funds rate and a steeper yield curve.

To translate, while the narrowing slope of the yield curve historically has been a good harbinger of recession, this time is different. It's our job to figure out whether option No. 1 or No. 2 is the operative scenario.

Face Value

I've never understood attempts to deconstruct the yield curve. It is what it is. A is A. It matters very little why long rates have resisted the pull of short rates higher. The fact that the policy rate (the overnight federal funds) rate is 350 basis points higher than it was in June 2004 while the market rate (the 10-year Treasury note) is virtually unchanged is all the information one needs.

The flat or inverted yield curve suggests the central bank is holding its pegged rate too high relative to the rate set in the marketplace by borrowers and lenders.

In the old days, the Fed had to throw the economy into recession in order to bring down inflation. That isn't the case today. So the yield curve message should be particularly troublesome since the goal is only to normalize rates, not restrain growth to any significant degree.

...

[LadyRuby]

Mr. Bill or others, any thoughts on the current state of the inverted yield curve?