Jon
Preferred Member
Cash: $ 50.02
Posts: 193
Joined: 13 Apr 2005
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| Bond yields continue their fall cracking below 4.80% New Fed |
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Man what a week for bond yields. They started the week far below the Fed Funds rate (5.25% after the last Fed rate hike) ranging from 4.85% to near 4.9% with an 8 basis point spread between the 2 year and the 10 year. The 2 year and 10 year dove lower Friday with the 2 year outpacing the 10 year to the downside. At the close Friday yields were 4.76% versus 4.73%, just a 3 BP inversion. That is not enough to really scare up a recession, but as discussed Thursday, the spread between the Fed Funds rate and nominal bond yields is huge, almost 50 BP with the 2 year note. What nominal yields are saying, indeed screaming, is that the Fed Funds rate is too high for the economy, not too mildly suggesting the Fed should think about cutting some rates.
Interestingly, the Chicago Fed has produced a study of bond yields and the correlation to economic cycles. The study indicates what we all knew it would: inversions between short term bond treasuries and longer term treasuries tend to foretell economic slowdowns. The Fed study suggested a 30 BP inversion between the very short term yields (e.g. 30 day) indicates a recession. The study also concluded that the longer the inversion the more likely a significant economic slowdown.
Now Mr. Greenspan was telling us last year not to worry about an inversion, that it was due to extraneous factors such as heavy foreign buying of treasuries. There is no doubt that is ongoing, but even Mr. Greenspan said he was not sure to what extent the buying contributed to the inversion. Thus he was saying ‘trust me, don’t worry’ about an inversion, but in the same breath implied the trust was not well placed. Now the Fed itself has concluded it doesn’t matter what the reason is; big inversions or inversions that last a long time foretell economic slowing.
This report is similar to other government grants to fund a study that concludes if kids stay up past midnight and don’t do their homework they don’t perform as well at school. Who needed a study to conclude that? Just look at history. Same with this report. The problem is, Greenspan made it necessary to do this with his speculation and resultant conclusion that the inversion was not as good an indicator as in the past. Of course being a politician Greenspan hedged his statement, but nonetheless that sent us down the wrong path on monetary policy once more, and likely the Fed has raised rates too long without really attacking the root of the problem, i.e. excess liquidity until AFTER Greenspan left.
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