Search Results for 'yield curve'


Titled “Out-of-the-box Thoughts on the Yield Curve”, Steve Saville throws out some very good commentary on the current yield curve inversion. I have to admit that his commentary has defined my own understanding of what yield curve inversion really means and what (if anything) it forecasts. (more…)

Check out the latest CD rates at ING Direct… I copied a few of the rates here:

  • 6 mo – 5%
  • 12 mo – 5.25%
  • 24 mo – 5.30%
  • 26 mo – 5.25%
  • 60 mo – 5.25%

So, if you’re shopping for CDs, ING will pay you more to hold your money for 24 months than to hold it for an even longer term. In economic parlance, that’s an inverted yield curve. (You can see a similar inverted curve at VirtualBank where the big winner is the 6 month CD at a 5.55% APY.)

Nevermind that the real bond market is also inverted right now. We can discuss the implications of that in a different post…

More on the yield curve…

Eddy Elfenbein recently put forward a simple model relating gold prices and interest rates:

The key insight is that Gibson’s Paradox never went away. It still exists, just in a different form. I got this idea from a 1988 paper by Larry Summers and Robert Barsky, “Gibson’s Paradox and the Gold Standard.”

Where I differ from Summers and Barsky is that I focused on short-term interest rates while they focused on long-term rates. Well, with Operation Twist we got a perfect test of who’s right.

The Fed’s new plan is to sell short-term Treasury bills and buy long-term Treasury bonds. This means that long-rates will be pushed down and short-rates will be pushed up. If gold rises, then Barsky and Summers are right; if gold falls, then I’m right.

At this point Elfenbein is only talking about correlations. But as he continues to discusses his model, he seems to take a causal stance:

I said in my original post that the price of gold is basically a political decision. The Fed can change the game anytime they want to. I can’t say whether this will lead to a long-term decline in gold. That will depend on inflation and interest rates. But for now, the gold market is clearly observing the short end of the yield curve.

I don’t want to presume too much about Elfenbein’s belief about any potential causation. But it’s still an interesting question: is there any evidence of causation? If so, in which direction does it run? (more…)

I was just reviewing an old post on liquidity analysis, and I thought it would be worth re-visiting the topic with some updated graphs.

First, the context… from that post back in October 2006:

…there is a 4 step hierarchy in terms of what drives markets. The first step is liquidity, then flow of funds, sentiment, and microstructure indicators (i.e., microeconomics or technical analysis). The basic idea is that everything flows from liquidity, and that liquidity is the largest of all influencers. The liquidity environment (expansion or contraction) is the mother-trend and is the ?rising tide that raises all ships? when expanding.

…A falling value on the chart of the yield-spread indicates liquidity expansion as the yield on the 10 year gets closer and closer to the 3 month. Inversion occurs when the value on the StockCharts graph is below 1.0. A rising value indicates liquidity contraction.

Here were the two charts presented in that post:

2000 vs. Now 1994 vs. Now

Now, on to the current situation. Suffice it to say, we’ve experienced quite a liquidity contraction, with interest rates dropping like crazy.

Let’s first look at the last 20 or so years… (click for detail)

200908021838.jpg

One quick note — the post in 2006 was written with yield spread inversion in mind. As we can plainly see, that inversion did not last long (6 months?), and the resulting rise in the yield spread obviously corresponds to the vanishing liquidity that we have endured since then.

It’s very interesting to note that the current spread between the 10 year and 3 month yields is back up to the same approximate levels as in 1991 as well as in 2001-2004, certainly both times of economic stress. Is this a natural stopping point for the yield spread? I’m not sure, but it will be interesting to watch. An argument could certainly be made that we have gone as far as we are likely to go in liquidity contraction, if things hold to the norms of the past two decades. (Note that any good statistician will tell you a sample size of 2 means nothing…)

Just as when the yield curve was inverted, it is important to wait for evidence of a trend change before passing any final judgement.

Just a quick post, I found this website and it looks like a good source of information on Municipal Bonds, specifically buying individual bonds directly rather than via a fund.

MunicipalBonds.com

Looks like you can search for bonds by state and by type (revenue, callable, etc.). They even have the yield curve for individual states. Seems like a nice resource if you’re interested in investing directly in muni bonds.

So, the yield curve inverted back at the beginning of August 2006… a full 8 months ago. As we talked about a few times, the typical response to an inverted yield curve is a recession in 6 to 12 months…

Well folks, we’re smack dab in the middle of that timeframe now… and several of the yield spreads worth watching are closing in on the zero line.? Some would say the uptrend in the yield curve is the real harbinger of ill fates, rather than the inversion itself.

Anyone want to take a bet on whether or not we’re heading into a recession?

I read a while back that there is a 4 step hierarchy in terms of what drives markets. The first step is liquidity, then flow of funds, sentiment, and microstructure indicators (i.e., microeconomics or technical analysis). The basic idea is that everything flows from liquidity, and that liquidity is the largest of all influencers. The liquidity environment (expansion or contraction) is the mother-trend and is the “rising tide that raises all ships” when expanding.

I decided to take a look at liquidity trends over the last few years, and maybe in the process compare the current environment to the last (only) soft landing in 1994 as well as the recession in 2000.
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When I read this?AP report, my head spun.? Why?? That’s what happens when the media spins every number coming out of the Fed until you can’t help but get some bodypart caught in the whirlpool.? This is a perfect example of what happens when monthly changes in economic releases are compared instead of looking at year-over-year.? Ahead Of The Curve spends several chapters discussing the flaws of comparing one month to the next instead of looking at annual rates of change.

If you believe this article, we are all doomed.? But a simple glance at y/y charts shows that income has been?accelerating like a shot and that this, in turn, has now caused consumption rates to turn upwards.? So the very numbers that spell doom to this writer, are actually reflective of an improving picture.? Same numbers, completely opposing views.? Here are the y/y charts of my two favorite economic indicators, real hourly income and real PCE (i.e. consumption):

09292006income-1.jpg09292006pce-1.jpg (more…)

I’d like to look at the technical situation in the gold markets and compare the current correction to the market situation back in 2002. Hopefully we can learn something, and maybe even anticipate the direction of the gold market a bit… I’m not going to cover the fundamental story, or why we want to own gold… that’s a topic for another post…

There are many a gold bug that think that gold will travel in a straight line — straight up! They buy at any price, and expect the world to fall apart on any given day. It would all be a lot easier if the price of gold moved in a straight line, but alas, we have to deal with reality here.

Price changes in gold can be violent, and it’s incredibly painful as you expect prices to go straight up, when in reality they go down by 21% in a two week period as the HUI index did from 9/11 to 9/21.
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