The mainstream financial media don’t talk much about the yield curve any more. It was a big deal when it first inverted, but has since been eclipsed by more bullish narratives. Yet the most bearish implications of a yield curve inversion come when it uninverts.
We last took inventory of the yield curve a couple months ago. Let’s see how it has evolved since.
20240505
20240720
Notice the veritable crash in the 1-5 year range. The yield curve is actually more inverted in the shorter maturities now than it was a couple months ago. This is a mostly function of the Fed having held the extreme short end fixed while the bond market has been doing rate cuts. So we’re not yet on the cusp of an uninversion.
But should the Fed follow through on its threats to cut its Fed funds target, that will change rapidly. The bond market is already cutting rates. Combine that with the posture of the stock market, with the possible bursting of a bubble breaking in the high flying tech supercaps, and with less supportive seasonality, and the picture looks like one of elevated risk.
Outstanding article … it helps explain the often cited disconnect between superficially “good” economic statistics and less good economic reality average people say they experience. It highlights some things popularly cited economic stats don’t capture:
Things Fall Apart
While the media debate Fed angels pin dancing, the bond market has already started to cut rates. Just since the beginning of this month, the one year treasury yield has declined from 5.10% to 4.83% … a full 27 bp rate cut.
I really wonder if the Federal Reserve should cut interest rates at all–even in the face of a recession–since, as you say, the market is already effectively cutting rates on the longer duration Treasuries by bidding up the price. Thanks to decades of the Fed’s unwarranted interventionary policy, we have both a rickety real economy as well as a rickety FIRE economy. I don’t see how further intervention can do anything other than make things even more rickety; i.e., worse.
Either due to people selling off equities, real estate, other assets, or lower-rated debt to buy Treasuries or due to excessive money creation by the banking system where the newly-created money goes into Treasuries as everyone forced to play the Fed’s game of musical chairs realizes that there is a high risk of the music stopping, Treasury demand seems to be high as people are cashing in their chips and lottery tickets and are seeking a means of protecting of principal.
I’ve been wondering if piling into Treasuries or going to cash is the right thing to do this time. It was most certainly the right thing to do in the 2020, 2008, 2000, and prior recessions. However, sooner or later, a market calamity met with the Federal Reserve dropping the Fed Funds Rate to zero will not result in yields at the long end dropping and it may even be possible that yields at the short end no longer behave. It seems to me that the powers-that-be have really made of mess of things over the decades and it’s gotten to the point where they seem to be losing control of the machine.
I still feel that there’s a better than 50% chance that going to Treasuries and cash will work this time around. However, we really are living on borrowed time [I’ve been thinking more and more that the bubble this time is the bubble of living in an empire and being accustomed to the unearned fruits of living in an empire.] and I strongly suspect that we’re past the point of no return.
The everything bubble is arguably a crash … in the unit of account. When you price things in a different unit, for example gold, you don’t see so many bubbles. In terms of gold, for instance, stocks are notably lower than they were at the turn of the century, and haven’t really gone anywhere in five years.
Of course there are bubbles in specific areas like big tech, where you see a handful of stocks accounting for an outsized share of the entire market. And there is the ever-present possibility that the unit of account ($) is oversold and due for a bounce (which would appear as falling asset prices). If it doesn’t bounce, another wave of painful consumer price inflation is inevitable.
Anyway, I agree there’s some justification for an overweight to USD and UST. At least until short rates fall and the yield curve uninverts, and it becomes clear that either the bounce has happened or that the full cycle is complete without it having happened. FWIW I am overweight USD & UST (along with gold) and plan to remain so until that’s resolved.
When I say “short rates” btw, I have 1 year Treasuries in mind. I don’t really even pay much attention to Fed funds anymore, given that it’s become such a propaganda tool. Not to mention the one year rate has already started to move down, so I can deal with fact not speculation … and be ahead of the Fed at the same time.
As I’ve said before though, I no longer regard Treasuries as an attractive long term investment. My working hypothesis is the secular trend turned in 2020. The spiraling federal debt and the factors you cite are the new fundamentals.
The media’s obsession with speculating about future rate cuts is a gaslighting operation aimed at the despised “retail” investor (folks like you and me).
The corporate financial media are NOT our friends, they are a marketing arm of Wall Street. Their aim is to sell their lucrative product to us rabble at the highest prices possible. Why else would they devote many times the reporting to speculation about future Fed rate cuts than to fact about actual rate cuts taking place in the real world?
Two reasons:
The underlying message to the retail investors to whom it wants to sell stocks is ‘buy stocks now ‘cuz the Fed’s gonna cut rates and then they’ll go much higher’. That this is pure malarkey is clear from the fact that the Fed cut rates all the way through the last two major bear markets – 2000-2002 & 2007-2009 – but you will never hear them mention that when carpet-bombing you with rate cut talk. It’s a classic buy-the-rumor-sell-the-news trade.
The other message is to the Fed. Wall Street knows sure as shootin’ this Fed doesn’t like to surprise markets. It wants its policy to be expected. So by creating expectations, Wall Street can effectively pressure the Fed to do its bidding. Wall Street thrives on easy money, so by talking up Fed rate cuts – as it has nonstop for months – it lobbies the Fed for the self-fulfilling prophesy it craves.
OIl?
Its coming
Echoes of 2008 … when WTIC hit $147 at mid year only to plunge 80% to around $30 before year end.
Coincidence? A whiff of deflation in the air?
WisdomTree must be reading Finster:
Cutting Rates Without the Fed