Thursday, October 1, 2009
What is a Flattening Yield Curve, and What Does It Mean?
If you don't know what a flattening yield curve means, watch this handy graphic from CNN.
Many websites - such as Bloomberg - provide charts showing the current yield curve.
CNN provided an overview of flattening yield curves in a 2005 article:
The graph of bond yields in the Treasury market usually slopes upward, with yields on longer-term bonds higher than shorter maturities to compensate investors for taking on the additional risks of a longer-term investment...If the curve flattens gradually, most traders said it probably means investors believe the Fed will keep future inflation in check with gradual rate hikes. Bond traders hate inflation because it erodes the value of their fixed-income investment.
But if the curve-flattening trend speeds up?
"It's time to trade out of investments whose success depends on a strong economy... for both stocks and corporate bonds," said Anthony Crescenzi, chief bond market strategist at Miller, Tabak & Co., an institutional brokerage.
This means reducing exposure to sectors like retail, transportation and automobiles and moving into defensive picks like health care and consumer goods.
But how does the market gauge whether the curve is flattening fast or slow?
Crescenzi said that over the last two years, the spread between the two-year note and the benchmark 10-year bond has shrunk by about 10 basis points per month. (100 basis points = one percentage point.)
But over the last year, the spread has diminished by 15 basis points a month, a faster pace that raised some eyebrows and sparked yield-inversion speculation. But, Crescenzi said, this seems reasonable since it is pretty much coincident with the Fed's rate hike campaign.
"It is when the pace becomes much faster than 15 basis points a month that investors should start to worry," he said.
Flattening Yield Curve Points Toward Deflation
PIMCO's Bill Gross said:
There has been significant flattening on the long end of the curve,” Gross said in an interview from Newport Beach, California, with Bloomberg Radio. “This reflects the re- emergence of deflationary fears. The U.S. is at the center of de-levering as opposed to accelerating growth.
Gluskin Sheff's David Rosenberg, Tyler Durden and Mish also believe that a flattening yield curve indicates deflation.
Bloomberg writes today:
The yield on the 30-year bond fell 11 basis points, or 0.11 percentage point, to 3.94 percent at 1:31 p.m. in New York, according to BGCantor Market Data. That’s the lowest level since April 29.
Many analysts, such as Donald Dony, also argue that a flattening yield curve portends moves in the stock market.
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These -yield curve- suppositions are far and away too simplistic -and- do not tell even a small part of the whole story behind the many possibilities that might describe why yield curves, and indeed -yields- change both long-term and short-term.
ReplyDeleteMost of the related discussion cited in the article is drivel -IMHO.
Consider: a flattening yield curve that means deflation might indicate the long-term end of the yield curve is dropping relative to the short end, and not vice-versa. Or, is it? No one steps on that banana.
It cannot follow that anyone would buy bonds that paid negative interest, but the Fed might under any one of its bailout programs in existence today. But I digress, for we are talking of Treasury bonds, or are we?
In a deflationary environment that is not expected to worsen or compound in a negative yield sense, the yield curves could move in unison, or, maybe not too.
In a deflationary environment that was worsening, the long-term end of the yield curve could give way faster than the short-term end of the yield curve, but neither would ever reach negative a return, or so we might erroneously suppose. We anyone buy Treasury bonds and accept a negative yield? Yes. In a way the Chinese have been doing it for years.
If the opposite were true, that the short-end of the yield curve was rising relative to the long-end of the curve, it could indicate a short-term tightening of liquidity -or- an overall concern about growth and demand for bonds over the longer term, -or- both!
If the short-end of the yield curve was rising
but in unison with the long-term yields, it could indicate an anticipation of tightening liquidity that would continue. It could mean that...
If the short-end of the yield curve were dropping relative to the long-term end, it could indicate a temporary increase in liquidity -or- a decrease in demand, perhaps in anticipation of war? or a war-ending peace dividend?
How any this can be offered as an indicator concerning where one might place their "investment" wagers is clearly just a leaking faucet of hocus pocus intending to drip, drip, drip upon the weary, confused intellect mired in the insane belief that economics is anything more than like trying to play a game of chess inside a very large washing machine on the rinse cycle.
Don't start feeling comfortable. That's the surest sign your money is slipping away from you.
Markets are not perfect indicators of anything.
The markets are corrupted by almost uniform misinterpretations and misrepresentations of events, and the intentional bobs and weaves by the big boys who have the fiscal capacity to unleash short-term and long-term floods that start extremely profitable stampedes of smaller-capacity gamblers who do not really understand the rules of the game.
Many of these floods are propagandist in nature, and the many journalist-and-industry-fools who speak with very well misplaced authority about such things -that cannot be spoken about with any authority- are far more than half the decipherment problem.
Clearly the Fed policy of late has caused a drop in both the short and long term yields.
The Fed policy by this rationale is also exacerbating the ongoing and accelerating deflation problem -because when yields drop, the money these yields would otherwise pump into the system ceases to flow out onto the plains where everyone grazes, which is also exactly where everyone also defecates, which is what makes the grass grow so well, bullshit.
Were some to anticipate tightening, as the article says, the long-term end of the yield curve would be rising obscenely like Richard Bove's gigantic posterior when he is about to let loose a bit of his well-paid-for manure concerning banks and bank stocks.
You want a safe place to put your money?
Put it in your mouth.
That way you can't say so much that will confuse anyone -so much so- we won't have to read how no one is an investment adviser for fear of the liability they might incur for shooting off with their half-baked ideas about yield curves.