U.S. Treasury Yield Curve

Via Mike Panzner, this morning we look at the U.S. Treasury Yield Curve — the 10-year less 2-year spread.

It hit -0.166 yesterday, the lowest level since December 2000.

It seems that the bond market is saying "hard landing" as stocks say: "What, me worry?"


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  1. Mike M commented on Nov 15

    The market seems to be on sedatives. The last few months have been very difficult to understand.

  2. jjj commented on Nov 15

    call it cognitive dissonance…one of the markets is very wrong…it also troubles me that corporate bond spreads refuse to widen . the other indicator i prefer is also not cooperating as the weekely claims data refuse to rise from the 310,000ish at which they have been stuck for awhile……jjj

  3. Bruce commented on Nov 15

    Maybe it’s just more irrational exuberance…

  4. Bruce commented on Nov 15

    Or maybe things really *are* different this time!

    Ha ha. Sorry.

  5. me commented on Nov 15

    Aw Bruce, you beat me to it.

  6. HS commented on Nov 15

    Someone just needs to yell BOO!

  7. swapped commented on Nov 15

    You guys keep doom and gloom. Why don’t you wait until the markets actually TURN before predicting.

  8. Jim commented on Nov 15

    Spec money is now pouring into the markets, in addition probably alot of margin buys ging on as well. The current rally may be much more powerful then we think. The S&P has a good shot at closing at an all time high by the end of the year,if not sooner.

    Joe and Jane Six Pack still need to be sucker in before we see a correction of any significance.

  9. bodanker commented on Nov 15

    >> You guys keep doom and gloom. Why don’t you wait until the markets actually TURN before predicting. << Because making a "prediction" after the fact isn't generally regarded as a prediction.

  10. mojave commented on Nov 15

    Haven’t we been here a few times before? I know we discussed at length the “who’s smarter money: bonds or stocks”? earlier in the year. I was raised to believe the bond market is the smart money, and I’m bearish on the stock market, but who knows? In a previous comments section I posted links to two Howard Simons’s articles (fwiw) showing the bond market is absolutely historically no better than the equity market at predicting the economy going forward. ( Now I’m just gonna tighten the straps on my helmet while I wait to find out).

  11. donna commented on Nov 15

    Stock market is the new inflation – too much money chasing too few good stocks…..

  12. Michael C. commented on Nov 15

    Maybe with the democrats taking over, the terror premium is being rung out of the market.

    Maybe a Vix of 8-9 is not out of the question putting the SP well into 1450-1500 territory?

  13. Philippe RAFAT commented on Nov 15

    The predictive power of the long term yield curve has been quite dented since it is inverted since two years already.(The Krontief 10 years cycle predictive power is much more accurate in term of probability of occurence of a recession). Last year market’s incongruity was on the bond markets with the same pattern as the stock markets this year a continuous grinding on the upwards and no return on the downside, the marketing was ensured by Bill Gross whom was predicting a recession in 2006 and the 10 years yield at 3.64% a good ..buy!
    There is a large dissonance between the worries of the treasury continuously marketing its bonds and the pit appetite for bonds (UBS and few other banks have been invited for a cup of coffe to the Fed office to discuss this matter recently).The beneficiaries are, the US treasury which is paying less for issuing more debts, the mortgage borrowers whom are not seing their debt burden skyroketing the mortgage loans rates are tied up with the ten year treasury yields, the losers are the banks which have a hard time making money when borrowing short term money through deposits or interbank borrowing at almost a higher rates than their mortgage loans (this is the hypocrit conodrum of Mr Greenspan) This mistmatching in interest rates will come and has come in the lack of profitabity of the banks, you will see further nasty effects on their profit and loss accounts.

  14. Michael C. commented on Nov 15

    You know things are benign when OJSimpson makes the front page again.

  15. Richard commented on Nov 15

    you bears continue to sit there with slack jaws wondering why the market keeps going up contrary to all your knowledge saying otherwise and you miss out on investment gains. thankfully i don’t perscribe to any particular position as that would clearly put me at a disadvantage.

  16. Darth Trader commented on Nov 15

    Very well said Richard.

    You know when a bear’s roar is the loudest?

    Just before they are about to consume you whole and just before they draw their last breath before dying.

    I leave it to the markets to decide which is which, then I’ll trade off that determination.

  17. JS commented on Nov 15

    “Stock market is the new inflation – too much money chasing too few good stocks…..”

    Exactly. Not just the stock market, all asset classes: stocks, bonds, commodities, real estate, collectibles, you name it. The world’s central banks are pumping too much money and easy credit into the system (Issing recently commented on this, but such considerations are ignored by American central bankers.) More and more of that creation is ending up in the top end of the wealth spectrum where it works its way into investment. The middle and lower classes consume on credit while the wealthy inflate all asset classes. And the central banks accommodate it all. Thus the bond and stock markets aren’t saying two things, they are saying the same thing: there is too much money in the system chasing too few investments.

    The real question is: what’s the endgame of such robust monetary inflation?

  18. emd commented on Nov 15

    nice post JS. i agree 100%


  19. Macro Man commented on Nov 15

    An analogue to the point raised by JS above is that the global economy is more synchronized than it has been in a long, long time and, by extension, the risk-adjusted returns generated by asset markets in various countries have tracked each other closely. It is a mistake to consider that this is a uniquely American phenomenon; the robust and resilient growth of corporate profits simply reflects that globalization to date has favoured capital (and consumers) over labour.

    US equities are not particularly expensive on an historical basis, though they are somewhat more expsnive than, say, European equities. Nevertheless, this can perhaps be justified by the facts that the US a) enjoys consistently stronger nominal GDP growth than Europe, and b) the US economy is more corporation-friendly than that of Europe.

    Click on my name to see some charts demonstrating the synchronicity of the global economic cycle as well as the remarkable convergence of risk-adjusted returns in the US, Europe, and Japan this decade.

  20. Michael C. commented on Nov 15

    >>>The real question is: what’s the endgame of such robust monetary inflation?<<< The bigger the game, the bigger the time frame I say, and the bigger the crash. I whole heartedly agree with the notion of asset inflation. I do believe the massive unwinding of easy credit will wreak havok sometime in our lifetime. But damn that's a long time frame.

  21. Josh commented on Nov 15

    Been noticing some trolls…I wonder where the market will go next.

  22. Mr. Beach commented on Nov 15

    Think of it like one giant vendor finance scheme.

    Back in the Dotcom bubble days, telecom equipment providers extended financing to their customers to buy their equipment. The customers made payments out of the proceeds of stock issuances. This entire cycle worked wonderfully for more years than made sense.

    Today, Chinese, Asian and Mid East vendors extend financing to their American consumers. The recycling of dollars has made it appear that both sides are remarkably robust.

    For the moment, it appears that the cycle is permament.

    In reality, the Japanese experience demonstrated that borrowers can eventually reach fatigue: specifically: borrowers will stop borrowing when they realize they cannot repay the loans. Bringing interest rates down to 0% did not spur growth in Japan.

    IMHO, we are seeing the leading edge of this phenomenon in the US housing market. Borrowers are unwilling to take on ever greater loans because they are acutely aware of flattening market.

    We can only speculate what the next stages are.

    But I would not be surprised if the world follows the Japanese path into deflation. As American buyers slow down their purchases, the massive oversupply of Chinese factories continues to churn out goods — leading to deflation in consumer prices. The Fed, feeling an urge to do something, begins to cut rates in order to spur growth. Borrowers jump at the chance and refinance but become unwilling to borrow to spend. The drop in rates also causes a big drop in the dollar.

  23. Kevin_r commented on Nov 15

    >> You guys keep doom and gloom. Why don’t you wait until the markets actually TURN before predicting. << Because we don't get to backdate our purchases.

  24. Mr. Beach commented on Nov 15

    One more thought.

    The reason we bears are so disturbed is because the world financial world is now unbalanced. Capitalism and commerce are built on one fundamental principle: buyer and seller both benefit from an equal exchange.

    This principle has been violated many times in the past — where in hindsight, it was obvious that either the buyer or seller was grossly abused. But it has NEVER been violated over a long and extended period of time.

    The Emperor has no clothes moment came to me the other day in a electronics store. I overhead a salesman explain how to finance a $4K flat screen to a slackerish 25 year old.

    The imbalance is this:
    . Asians are producing stuff.
    . Americans are buying stuff — but not producing.

    Thats it. This is long term unstable. We all know it intuitively. We just don’t know how it corrects itself.

  25. SG commented on Nov 15

    The yield curve has thus far been reflecting slowdown, not recession. – Stocks have stayed bid, because slowdown (soft landing) would be a very welcome situation. The danger is the longer and deeper the inversion goes on, the greater the odds that an a harder landing develops.

    As for the payroll data/weekly claims, this is often one of the last indicators to turn. In early January 2001 the December unemployment rate was released at 3.9%, a mere 0.1% higher than its low in Q3 of 2000. Yet 2 Days earlier the Fed had cut rates by 50bps, they cut a further 50bps four weeks later. The jobless claims had only started to show an uptick in December of 2000.

    – Meantime returning to the curve inversion of 2000, it hit levels equivalent to where it is now early in the summer of 2000. The S&P hit a monthly closing high in Sept of 2000, so really the situation now is reminiscient in many ways to the situation in late summer 2000.

    – To write the curve inversion off as a failed in indicator is a dangerous exercise. It it not foolproof, but over many years it has been very reliable. – Thus far it is signaling slowdown not recession, however, watch how it evolves form here.

  26. GS commented on Nov 15

    If the performance of the bond and stock markets worldwide seem confusing to you based on your perception of what “should” happen under current fundamental inputs then I humbly suggest looking at a particular business cycle that has called all the turns like a road map for the twenty plus years since it was discovered.

    I am referring to the 8.6 year global business cycle which is part of a longer 51.6 year cycle.

    The next major TOP is due Feb. 27, 2007

    The last major bottom was Nov. 8, 2002 which was one month from the Oct. 2002 low in the stock market.

    The Economic Confidence Model in 2.15-year intervals:
    1998.55 = 07/20/98
    2000.7 = 09/13/00
    2002.85 = 11/08/02
    2005 = 01/02/05
    2007.15 = 02/27/07
    2009.3 = 04/23/09
    2011.45 = 06/18/11
    2013.6 = 08/12/13

    For complete details with charts go to:


    By the way, the guy that discovered this specific cycle has legal problems and that is beside the point. His cycle research stands on its own in my opinion.

  27. Macro Man commented on Nov 15

    Mr. Beach

    I think that there was a missing link in your analysis of the vendor financing analogy which is I believe is, broadly speaking, a correct one. That link is that in many cases, Asians are producing stuff whose intellectual property rights belong to US firms, who then import the goods and sell them on to domestic consumers.

    In this case, the economic rents of the vendor financing scheme do not accrue simply to the producers/assemblers/exporters; in fact, a good deal of the economic rent accrues to the owners of the intellectual rights of the goods in question, who benefit via lower costs of production. This is obviously embodied in the outsorucing phenomenon, and is one reason why US corporate profits in the NIPA accounts (ergo, not just SPX firms) have grown so strongly over the last several years.

    How does it it end? A good guess is protectionism, whereby one disenfranchised constituency in the US (displaced manufacturing workers) attempt to claw back some of the economic rents enjoyed by other constituencies (US firms and consumers of cheaper-than-domestic goods.) If any American government is foolhardy enough to say to the rest of the world ‘neither your goods nor your dollars are welcome here anymore’, that is how it will all go horribly wrong. Until then, the symbiotic relationship whereinmost participants come out ahead can persist far longer than traditional closed-system balance of payments economics would suggest.

    Ultimately, of course, it would preferable for all concerned if the Asian exporters used their revenues/foreign exchange reserves to climb up the development ladder rather than buy government bonds like no tomorrow, but that is a choice that they have yet to make.

  28. alexd commented on Nov 15

    God I am going to have to start a blog! (Any advice on this is most appreaciated).

    I am going to try to give some random feedback as I write.

    First I am really gald to see that other folks have typos just like me. It allows me to keep up the charade that the mistakes have absolutly nothing to do with my inteligence and insight. (ahem!)

    What is the endgame of such monetary inflation?

    Now remember it is the scotch speaking and not me. Who the f cares? Okay I care but not in the prissy liberal way that I usually do. I care only in how I can take advantage of it. It is like trying to fight that awfull tsunami in Indonesia. (Now do not forget that i am writing this from the midwest United States and have nothing to fear from big waves, we prefer tornados and blizzards here. ) Now if I was there at that terrible time I would have no doubt that I would have endeavored to help anyone I reasonably could have. I also would have let people I could not help drown. Which sucks, but such is the situation. Yes, I have been in situations where I put my own safety on the line, so I know what I am (at least in that area), Frankly I have done some things in hindsight where I review it and know if I had thought about it I would probably have done squat but I react and do not think. Probably also explains why my trading is not as good as I would hope. But what is really really important is all the cheap real estate on the beach that would have been available!
    Get it? Help people as much as whatever you think is reasonably possible, and buy when there is blood or in this case seawater, in the streets.

    So if there is a monetary crash something much bigger than ourselves, how will we take advantage of it? All you whatevers out there are so friggin concerened with getting that perfect optimal moment when a market turns. Well good luck! It is not likely to happen except by luck or you are so smart that you really should not care about it cause you should already be very very rich. ( Joel Greenblatt if you are reading this I tip my hat to you!) Cause you will have been making enough money on a day to day basis,anyway. So the question is you have some sort of tell like your dumb ass neighbor telling you how he is gonna go on margin in what ever market and you know that he is the last guy to come to the party. So now what are you gonna do? No one cares if you are short or long, No one cares on particular which market you are playing . At least I do not. But what are you gonna do ? And most importantly how much are you gonna bet? All you guys talk about what and when . No problem with that, but how committed are you to the postion? Also remember it does not matter if you bet the whole wad on your opinion. That might be the worst thing or the best. But what is your plan? And what is your contingent plan? How have you acted in the past when confronted with scenerio x? Cause you are likely to do the same damm thing again! I worry about this stuff. Cause I know underneath it all I am still the rat in the Skinner box pressing the lever for more cocaine or food or what ever makes me feel like super duper rat!

    You do not have to eat the whole apple to get rich . Three quarters of the apple is gonna do you fine.

    Remember I am not writing this out of arrogance. I make all these mistakes too! Do you guys want me to make rat sounds? Okay here goes:

    Squeaky squeak squeak.
    Welcome to the monkey house.

    I have a system that gives me great stocks to buy. It really does, but it is money management that makes me nuts. And determines my results more than anything.
    So which game do we play, how are we going to play it? How much do we bet? When do we quit the game? How do we spend the proceeds in a way that enhances whatever gives us meaning in our lives?

    If the dollar is likly to fall on decreasing rates , short the dollar buy long term bonds. If inlflation is going to go up, then buy gold and hard assetts, short bonds.

    Perhaps we should look at the relationship of Europe to the United States After WW2. We had the power and the capacity to produce. Europe had the need. What happened?

    Sounds like China might be more and more like the USA and we might be more and more like Europe.

    And now for the turing test….

    Be well.

  29. blam commented on Nov 15

    Anyone that thinks the progression of this market is a good sign is a fool. Six months of non-stop advance without a correction or a waiver, in the face of a potential recession, is not random. If the market is not random, and not reponding to a weakening economic foundation, then it is not a market. It is a rigged game.

    If it is a rigged game, then, ultimately, the entire world financial structure is collapsing.

    I enjoy gains as much as the next guy.

    I do not like listening to jerkoffs, sitting on the edge of the precipice eating a shit sandwich, without a coherent thought in their head, and insulting the passers-by, like some of the shit eaters who have been posting here lately.

  30. Andrew commented on Nov 15

    A cool applet that lets you explore the yield curve over the last thirty years is here.

  31. samuel commented on Nov 15

    Hey Blam, Ned Davis Research opined that the rise from the July low could be a blow off top. It is consistent with past blow off tops in the market.

    I’ve noticed the bulls have been getting a lot more smug and noisy lately.

  32. Rich_Lather commented on Nov 15

    The Chinese may be trying to stave off the inevitable by buying not only bonds, but stocks as well. The large chunk movements of the market do indicate a single buyer (yesterday, for example). When does the cash run out on this end run?

  33. my1ambition commented on Nov 16

    I wonder. Does Bernanke read this blog?

  34. Robb Palmer commented on Nov 16

    I dusted off my copy of Beckett’s Waiting for Godot the other night because I have been feeling a lot like the two main characters in the play. I have been waiting for over two years now for the market to crash and justify my short positions and have been continually disappointed. In the play, Godot never shows and I’m now coming to believe that the market will never crash. Maybe Beckett has been reincarnated as Bernanke or Paulson. In the meantime, all that I can do is wait and wonder how much longer this economic tragi-comedy can continue.

  35. charts commented on Nov 16

    “a rigged game”

    “the chinese are buying stocks”

    guys, please stop.

  36. robert commented on Nov 24

    money is flowing into stocks due to 1. real estate no longer looked at as viable investent; 2. bond rates are likely to go upwards quickly with devalued dollar; and 3. international looks iffy during its roll the last four years.

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