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  #91  
Old 08-14-2019, 04:32 PM
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  #92  
Old 08-15-2019, 01:22 PM
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https://fortune.com/2019/08/14/what-...ket-crash-dow/
Quote:
What Is an ‘Inverted Yield Curve’? And Why Is It Being Blamed for the Dow’s 800+ Point Loss?

Spoiler:
Alarms were going off in the stock market today. And what pulled the cord was a slight change in the interest rates of Treasurys.

Early Wednesday morning, the interest rate on a 2-year Treasury was slightly higher than the interest on a 10-year, an event called a yield curve inversion.

By market close, the Dow industrials were off 800 points, or 3.05%. The S&P 500 was down 85.72 points, which is 2.93%. And the Nasdaq lost more than 242 points, or 3.02%.


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But understanding why the yield curve has gained such importance—even Donald Trump tweeted about the CRAZY YIELD CURVE today—and whether it's sending true or false signals at the moment, is a little complicated.

Yield curves are a way of comparing the interest rates of the different maturity-date bonds a country issues—like U.S. Treasurys. In a normal market, interest rates (called yields) for longer-term bonds should be higher than those for shorter-term ones, because investors tie their money up for a longer time and want a greater reward for doing so.




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The yield curve is a graph of the interest rates for varying maturities: like 3-months, 6-months, 1-year, 2-years, 5-years, 10-year, 30-year, and so on. A line is drawn through the plotted points to show a curve. Below is an example for the yields on Aug. 13, 2019.


Current yield curve inversion
This is not a normal yield curve, even without a brief time where the 10-year yield was a little lower than the 2-year.

Yield curve inversion
Typically, the curve bends upwards because the shorter-term maturities on the left of the graph have lower yields than the long-term maturities toward the right.

However, sometimes shorter-term maturities offer higher yields than longer-term ones, resulting in the curve sloping downward from left to right. That's called a yield curve inversion, because it does the opposite of what people typically expect.

Inversion is important because of its status as an indicator of coming economic recessions. When short-term rates are higher than long term, it indicates the potential for a future recession because the numbers indicate that investors think the short-term economy is a better bet than the long term.


In this case, instead of a clear climb one way or the other, there's a dip in the middle—more on that in a minute.

Past inversions
"Typically these inversions occur 12 to 18 months before a recession," said Andrew Aran, a partner at Regency Wealth Management. But an inversion is just an indicator, as in recent times, only two-thirds of them have actually come before a recession.

But the inversion today is different from the past. "Every recession that we've had in the U.S. since World War II, with one exception of the Great Recession, was preceded by the Federal Reserve raising interest rates too far, too fast from much higher levels than the current levels," said David Kass, clinical professor of finance at the University of Maryland. The Great Recession, which Kass called "one of a kind," was the result of "an excessive amount of debt in the housing market and the collapse of the housing market and the economy."

But the Fed just dropped the rate by 0.25% and investors expect as many as three more small cuts by the end of the year. As for debt, "I don't see an excessive amount of debt in any sector," Kass said.

What's going on?
The pattern of the graph above is also not a clear inversion. Very short-term rates start at 2.05%, drop to a low of 1.57% for the 5-year, and then climb to 2.15% for the 30-year. The long-term yield is a bit above the shortest-term. But yields on the 2-year through 10-year are low.


"Generally speaking is what is a little different is a broad flattening across the curve," said Tim Alt, portfolio manager at Aviva Investors. People may not expect trouble in the long run but are nervous about medium-term prospects. "One way to interpret that is the market is pricing in lower odds that this is a mid-cycle slowdown and higher odds that it is going to end up in a recession," he said. There is also worry that central banks may have run out of tricks to stimulate the economy. "The concern is that the market is moving toward believing that fiscal policy is the only thing to move the needle," Alt said.

That means getting politicians to cooperate and forge useful actions that probably involve spending money to stimulate the economy. Such cooperation is going to be hard to find.

Other concerns
But the market's response has left many scratching their heads.

"I certainly understand the rally in [bonds]," said Steve Massocca, portfolio manager at Wedbush Securities. "The decline in equities is a mystery. And it's across the board."

"[Bank stocks] are being sold aggressively today, but their pricing on their loans is more sensitive to short rates" and short rates are holding, Aran said. "That seems to be possibly another over reaction, taking the banks behind the woodshed at an early point."


It may all come down to a case of nerves. Trade disputes with China and the EU are scaring many. Economies across Europe have slowed, with negative interest rates still in place there and in Japan. The markets seem primed to take everything at the moment as bad news, as the yield curve enters new territory.

Either that or jittery investors are about to talk themselves into a recession.




Ugh, what an awful way to graph that
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  #93  
Old 08-15-2019, 01:31 PM
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Using this:
https://www.treasury.gov/resource-ce...spx?data=yield

I'm going to pick 8/1 and 8/14 for comparison



Yuck.
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  #94  
Old 08-15-2019, 05:03 PM
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How do they define “inverted yield curve” anyway? There was a lot of talk about the yield curve inverting yesterday driving the big market move, but clearly, some type of inversion was already present in the data back on August 1. Other than lower rates across the board, the shape of the August 14 curve is effectively the same as the shape of the August 1 curve: you have drops until roughly the 3-5 year treasury notes, then the typical upward slope thereafter. To me, both curves display the same inverted pattern that often precedes recessions. Why would the markets have moved so much in the one day when the data showed the same thing two weeks ago? Is it driven by a more simple comparison of two points along the curve (e.g., the ten year rate finally falling below the two year rate)?

You can even see some degree of yield inversion in the January 2019 data (e.g., on January 2, 2019, the 1 year yield was 2.60%, but the 5 year yield was 2.49%). Why wasn’t that considered an inverted yield curve scaring people back in January?
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Old 08-15-2019, 10:49 PM
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Quote:
Originally Posted by nonactuarialactuary View Post
How do they define “inverted yield curve” anyway? There was a lot of talk about the yield curve inverting yesterday driving the big market move, but clearly, some type of inversion was already present in the data back on August 1. Other than lower rates across the board, the shape of the August 14 curve is effectively the same as the shape of the August 1 curve: you have drops until roughly the 3-5 year treasury notes, then the typical upward slope thereafter. To me, both curves display the same inverted pattern that often precedes recessions. Why would the markets have moved so much in the one day when the data showed the same thing two weeks ago? Is it driven by a more simple comparison of two points along the curve (e.g., the ten year rate finally falling below the two year rate)?

You can even see some degree of yield inversion in the January 2019 data (e.g., on January 2, 2019, the 1 year yield was 2.60%, but the 5 year yield was 2.49%). Why wasn’t that considered an inverted yield curve scaring people back in January?
Yes, the 10-year moving below the 2-year is considered 'the big one' and is the most commonly accepted definition of a truly inverted yield curve. You are right that there have been other instances of the inversion already this year using other maturity points, and I think the proper lingo for those situations would be something like "a partially inverted yield curve".
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  #96  
Old 08-28-2019, 03:54 PM
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Is there an accepted (or working) definition of an inverted yield curve?

That must be what they're talking about in the wsj...the 1 mo vs 1 yr?
Since posting this post I have read that the 2 yr vs 10 yr is the indicator used (by most talking heads).

The difference b/t those two (10yr-2yr) was 0 bps on 08/26 & -4 bps on 08/27. (Those were the closing prices, of course. I've heard that intraday trading has recently seen negative spreads.)

As I type this, the difference is about -3 bps. (edit: it closed at -3 bps.)

It otherwise hasn't been negative all year.

Last edited by 1695814; 08-28-2019 at 07:17 PM..
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  #97  
Old 08-28-2019, 07:16 PM
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  #98  
Old 08-28-2019, 09:05 PM
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https://www.ai-cio.com/news/sp-500-d...year-treasury/

Quote:
S&P 500 Dividend Yield Surmounts the 30-Year Treasury
The last time that happened was during the financial crisis, Bespoke says.


Spoiler:
Everyone’s upset about the inverted yield curve and what it means for the future (a recession in a year or so). But stock investors, at least, got some good news: The dividend yield of the S&P 500 climbed above the 30-year Treasury bond’s yield.

The broad-market stock index yields a tiny bit more than the 30-year, which closed Tuesday at 1.97%. There’s only one other instance, over the last four decades, that such a thing has happened.

That occurred in late 2008 through March 2009, the nadir of the financial crisis, according to Bespoke Investment Group—and marked the start of the bull run. The S&P’s yield almost went higher than the 30-year’s in mid-2016, with Britain’s vote to exit the European Union, but fell short.

The stock index’s higher yield should be a good portent for equities, according to Bespoke Cofounder Paul Hickey. “For an investor looking to hold something for the long term, it makes equities relatively attractive,” he told CNBC.

Right now, investors are crowding into the perceived safety of Treasury paper, which is viewed as risk-free because the US never has defaulted and has the world’s largest economy. All that popularity bids up the price of Treasury bonds, thus lowering the yield. At the start of August, the 30-year stood at 2.44%.

Of course, the S&P 500 also yields more than shorter-term Treasuries, such as the benchmark 10-year. As of Monday, Bespoke’s report reckoned that “two-thirds of the stocks in the S&P 500 yield more than the five-year, more than 62% yield more than the 10-year, and slightly more than half yield more than the 30-year.”

Indeed, 25 members of the stock index have yields above 5%. A lot of that is owing to epic slides in some stock prices. The highest yielding of them all is Macerich, a real estate investment trust (REIT) that specializes in shopping malls, which is an unloved sector these days. The REIT yields an amazing 10.7%. Over the past 12 months, the trust has lost half its value.

Sometimes, earnings slips are a factor. But Altria, the tobacco giant that just announced its intent to re-merge with Phillip Morris, has had decent results, although the stock is down 22.5% over the previous 12 months. It sports a 7.1% yield.

At the beginning of August, by Bespoke’s count at the time, 173 S&P 500 companies had higher yields than the 30-year Treasury.

Certainly, high stock dividend yields often signal weakness in the issuing company. But for now, investors are being paid to risk it.

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  #99  
Old 10-15-2019, 02:54 PM
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https://www.marketwatch.com/story/bu...hp_minor_pos20


Quote:
Fed’s Bullard says ignoring the Treasury yield curve has burned him in the past

Published: Oct 15, 2019 8:35 a.m. ET

St. Louis Fed president makes case for more interest rate cuts

Spoiler:
There are a lot of valid reasons why the inversion of the U.S. Treasury yield curve — that is, the yield of short-term bonds being higher than that of longer-term securities — isn’t a sign of economic worries.

But count James Bullard, president of the St. Louis Federal Reserve, as not one to ignore the yield curve’s predictive powers.

Elga Bartsch, head of macro research at BlackRock, asked Bullard whether in an era of rapidly falling natural interest rate estimates and a global savings glut, the yield curve still carries the same significance.

Bullard, at a conference on monetary and financial policy in London, replied that he was burned twice as a Fed staffer in the 2000s on trying to dismiss the predictive powers of the yield curve. He recalled a speech in 2006 from then Fed Chairman Ben Bernanke who also minimized the curve’s predictive powers.

“The idea has always been to downplay this issue,” Bullard said. “If you want to ignore the signal, you should say, okay, but I’m ignoring it with open eyes.”

The yield on the 10-year TMUBMUSD10Y, +2.52% is currently a bit higher than the 2-year TMUBMUSD02Y, +2.06% , at 1.73% versus 1.59%. Earlier in the year, the 2-year yield was higher than the 10-year.

Bullard, who wanted a half percentage point rate cut in September, continued to press the case for easier policy.

“Insurance rate cuts may help re-center inflation and inflation expectations at the 2% target sooner than otherwise,” he said.

The Fed is meeting at the end of October to determine whether it will make its third quarter-point rate cut in succession this year.

Asked by MarketWatch, he declined to quantify a probability of recession and acknowledged that most estimates of them are based off the yield curve.

He also said uncertainty about international trade policies is likely to linger for longer than markets anticipate.

“We’ve opened a Pandora’s box,” he said. “If you study the history of trade negotiations, they’re very long and very involved over a very long period of time.”

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  #100  
Old 10-15-2019, 03:53 PM
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as of friday the 2 yr yield was 1.63 and the 10 yr was 1.76, don't know what's happened since
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