Yesterday, and this morning, the yield on the 30-yr Treasury bond made its all-time historic lows. This is extraordinary, especially given the vast amount of stimulus and low unemployment rate.
However, the news on the teevee seems to be harping on the Yield Curve Inversion regarding the 10-yr and 2-yr treasury rates. This is old news. Yield curve inversions have been everywhere over the past several months, yet barely a mention from the mainstream financial press. What I was expecting when I turned CNBC on late in the day was the never-before-seen rate on the 30-yr going below the Fed Funds effective rate. Additionally, the classic ‘inverted yield curve’ is when the 10yr treasury rate goes below the Fed Funds rate (which tracks closely to the 90-day t-bll), which almost occurred January 2019 and again in March. This inversion first took place May 23rd well into the stock market swoon that began on May 1.
Below is a chart of the Fed Funds rate, 2-,5-,7-, 10-, and 30-yr rates. In a normal environment the curve steepens from low short-term rates to higher long-term rates. Inflation expectations and time value of money are what drives this structure. So, when we see longer term rates move below shorter-term rates it is at a minimum, unusual. Analysts generally agree that when this normal structure changes, that changes in the economy and markets are afoot.
As you can see, yields have been falling since late summer 2018. This coincides with many data points (durable goods, autos, housing starts, etc.) that peaked and began to move down, indicating slower growth (still growing but slower and slower). It was the last rate hike (light blue line) where the structure began to invert, and March 2019 when rates began to invert strongly. There was very little reporting about the 2-/5-/7-yr rates going below the Fed rate. The reason behind the lack of attention is that the stock market was doing well. If stocks are up, any negative news is spun as “investors brush off X”. Ignoring information that doesn’t agree with what we see or would like to see is a form of confirmation bias.
In 2007 Bernanke raised rates right through the 10-yr yield to slow down the real estate bubble. Powell has raised rates and ended QE, making effective rise in the Fed rate much higher and faster than past, going against other central banks, leading to a very strong dollar. Powell’s statement in July and fair economic data today, make a rate cut in September unlikely, despite market rates screaming to lower.
As I have mentioned before in my Observations, while there will be a recession again in the US, when it occurs is difficult to predict. The last 3 recession were immediately preceded by a re-steepening of the yield curve. Stay tuned!