8 ms·
Yield Curve Is More Inverted Than at This Point in Run-Up to Financial Crisis
- lallysingh 8y agoHow often does it invert? Had it ever happened without a financial crisis to go with it?
- 48snickers 8y agoAccording to the article, there has only been one false positive, back in 1965. Not sure how many inversions have occurred.
- deleted 8y ago[deleted]
- Four_Star 8y agoThe specific part that just inverted has inverted before every recession since 1957 (9 times) and given one false alarm in 1965
- majewsky 8y agoHere's the last nearly 40 years worth of that curve, with recessions marked for convenience: https://fred.stlouisfed.org/series/T10Y3M https://fred.stlouisfed.org/series/T10Y3M (use the range selector below the graph to see everything)
- byset 8y agoYes, it often inverts before recessions, but most recessions do not accompany financial crises. The business cycle is normal; financial crises are (or should be) abnormal.
- areoform 8y agoWhat can the average founder, employee, and person do in the face of this news? I understand that it’s scary, but what can we do to turn that fear into an actionable checklist?
- jrussino 8y agoSimilarly: I'm in my early thirties with young kids. Apartment life is getting cramped and we're ready (eager) to finally buy a home. How should this prediction/speculation factor into my decision?
- smallgovt 8y agoYou can see how fixed rate mortgages trend during periods of recession here: https://fred.stlouisfed.org/series/MORTGAGE30US https://fred.stlouisfed.org/series/MORTGAGE30US Using this data, you can make some guesstimates on how waiting might effect your home purchasing decision. By my read, mortgage rates tend to decrease during a recession. However, mortgage rates are already very low, so the potential savings may not be meaningful.
- vijayr02 8y agoWouldn't the larger driver be a potential fall in house prices?
- smallgovt 8y agoWith the exception of the 2008 financial crisis, housing prices typically appreciate during times of recession, albeit more modestly. My guess is that this is primarily driven by falling mortgage rates. "The FHFA U.S. house price index rose by an average of 7.4 percent in the year prior to a recession and prices rose an average of 2.7 percent from the start of a recession to the end" [ https://www.cnbc.com/2018/12/11/housing-could-be-an-unlikely-place-to-hide-out-if-a-recession-is-coming.html https://www.cnbc.com/2018/12/11/housing-could-be-an-unlikely... ]
- dragonwriter 8y ago> With the exception of the 2008 financial crisis, housing prices typically appreciate during times of recession, albeit more modestly. My guess is that this is primarily driven by falling mortgage rates My guess is that it's a smaller market with less price sensitive buyers, based on who can afford to buy and who is therefore likely to sell during a recession (the late 00s recession being different because of the central role of the housing market collapse in that recession.)
- chadash 8y agoSimple explanation of what this means. Here are current yields on Treasury Bonds (expressed as an annualized rate)[0]: 1 Mo - 2.47 2 Mo - 2.47 3 Mo - 2.46 6 Mo - 2.49 1 Yr - 2.41 2 Yr - 2.26 3 Yr - 2.19 5 Yr - 2.21 7 Yr - 2.32 10 Yr - 2.43 20 Yr - 2.68 30 Yr - 2.87 In normal times, rates are higher for longer terms. This makes sense: the longer I tie up my money, the higher interest rate I'm going to want. However, right now, the rates are mostly inverted. For example, I'd get a higher rate on a bond with a lockup period of 6 months than I would on a bond with a lockup period of 10 years. Typically, this sort of thing precedes a recession. Bond market investors think that a recession is coming, so they are willing to pay for longer term bonds on the assumption that rates on these will go down in the future when the federal reserve lowers rates (to stimulate the economy) and when people flee the stock market generally in order to avoid risk. [0] Source https://www.treasury.gov/resource-center/data-chart-center/interest-rates/pages/textview.aspx?data=yield https://www.treasury.gov/resource-center/data-chart-center/i...
- iambateman 8y agoThanks for this. Question: is there any rational reason an investor would invest in a 10-year bond when they could get a better interest rate on a six month bond? It seems like an inversion would result in near-zero long-term bond purchases.
- alehul 8y agoIf an investor believes that a recession is coming soon, then they'd be willing to receive a lower interest rate in exchange for a secure 10-year return. The fact that investors are purchasing long-term bonds at these inverted rates is exactly what indicates a possible recession. The lower price is a function of their willingness.
- deleted 8y ago[deleted]
- levthedev 8y agoSure, if you think that rates are going to drop next year, and would like to secure the 10 year rate instead of risking that. Another way to express it: if today, you believe the average rate over the next 10 years will be lower than the current 10 year rate, you should buy the 10 year treasury. This is a tiny bit simplistic as it ignore liquidity/volatility differences between buying a 10 year treasury and buying 20 6-month treasuries or 10 1 year treasuries.
- nostromo 8y agoI’m not convinced this is a recession signal, as much as it’s a reflection of the new normal for worldwide central banks. Put the 10 year in context: in Japan and Germany and other stable countries yields are negative. So you have to pay to lend those countries money, because the central banks are pushing yields negative. But in the US you can actually get a modest (but real) return on the ten year, so it’s quite popular. This popularity has pushed the price lower and flattened the curve. And while recession may not be in the cards for the US in the next few years, the next ten years is a whole different story - so given the newfound dovishness of the Fed given European and Chinese weakness, it makes sense to lock in some yield in those ten year bonds now.
- wilkystyle 8y agoWhile I'm not saying you're wrong (and I'm not pretending to know enough to fully understand all the forces at play here), the article ends with the following statement that I find interesting, in light of your comment: > Every time the yield curve inverts there is a theory about why it doesn’t matter. The stock market rallies that often follow inversions further allay fears that it really is different. In the end, it almost always ends up not being different.
- nostromo 8y ago"almost always" Keep in mind this signal was only discovered in 1989. So we have a forward-looking success rate of three out of three recessions predicted within a year or two. 3/3 is great, of course, but it wasn't delivered on stone tablets from Mount Sinai. The strange thing about predictive economic indicators is they often stop being predictive once popularized. Why? For example, in 2000 and 2006/7 the Fed raised interest rates aggressively even after the inversion. However, we know that the current Fed is looking at the curve, and has become much more dovish since the inversion. So it's entirely possible that it's predictive ability will be diminished precisely because policy makers are paying attention to it.
- pmart123 8y agoIn the current circumstance, one argument is that the Fed overreacted in raising short-term rates, making those rates artificially high. I suppose there is some support for this without looking too deeply into it as the Fed now is unwinding QE. Unwinding QE still is "tightening" monetary policy. My guess is that the Fed believes that by lowering its portfolio's duration is a more effective way to raise longer-term yields to prevent the yield curve from becoming more inverted. I'm not a monetary expert, but I suppose you could say this time is different due to QE/QT, or you could stick with how the market typically reacts after the yield curve inverts.
- dawhizkid 8y agoMore practically, at least for those thinking of buying a home on a standard 30-yr fixed mortgage, since it seems like the consensus among investors is that interest rates for long-term debt will fall it makes little sense to buy anytime soon if you can wait... Or does it make sense to go with an adjustable rate mortgage instead?
- sokoloff 8y agoBuy if you need/want to buy. Refinancing a mortgage after a rate decline is fairly easy and you’re likely to get a better purchase price in a (locally) high rate environment and carry that lower purchase price into your refinance. The diff in purchase price likely more than covers your refinance costs.
- r83 8y ago"consensus among investors is that interest rates for long-term debt will fall" - could you elaborate on this? Are you suggesting e.g. the rate available for a 5 year fixed mortgage is expected to fall, or that rates will fall over the next 30 years?
- sdinsn 8y agoFixed mortgage rates are already historically low
- rlucas 8y agoThe current Bankrate benchmark 30-year is 4.17%. That is, by historical standards, absurdly low. The likelihood that a rate drop will 1. occur, and 2. materially contribute to your financial well-being, is very low. Part of the reason is that when rates drop, prices tend to rise. https://fred.stlouisfed.org/graph/?g=NUh https://fred.stlouisfed.org/graph/?g=NUh
- draw_down 8y agoYour choices are "it's coming at some point" and "this time it's different".
- the_watcher 8y agoThe headline implies a claim that I don't see any support for: that degree of yield curve inversion is related to likelihood of recession. While that seems plausible, I've never seen analysis that being more inverted is a stronger predictor than simply being inverted at all.
- throw0101a 8y agoIt should also be noted that there is a delay between and inversion and a recession, with an average of about a year: * https://seekingalpha.com/article/4250934-yield-curve-inversion-panic-make-plan-bear-market https://seekingalpha.com/article/4250934-yield-curve-inversi... This means it will probably occur in the middle of next year's US presidential election. :)
- swarnie_ 8y ago> next year's US presidential election. :) Any chance the US can extend its terms? An election seems to last an entire year and be one of the most toxic events possible online.
- throw0101a 8y ago> Any chance the US can extend its terms? Sure. Just amend the US Constitution. No biggie. :)
- dragonwriter 8y ago> Any chance the US can extend its terms? In theory, yes, by Constitutional Amendment. In practice, before the next election? Short of an auto-coup, no.
- rmah 8y agoWhile technically possible, since it would require a constitutional amendment, there is no plausible scenario under which the term of the US president will be extended in the foreseeable future.
- ethn 8y agoThis could also be a bet that the economy is still yet to improve, as in times of good economy the coupon rate has historically dramatically increased. To extrapolate, if the investor expects the economy to peak in 5 years, he would be incentivized to allocate capital into short-term investments such as equities and short term bonds as to defer longer-term investing until those bond yields reach their peak.
- kss238 8y agoIf investors were putting more capital into short term bonds, wouldn't the yield of short term bonds drop, not rise?
- ethn 8y agoYes, so in this case investors are instead placing more of their capital in liquid assets, like public equities. With investors optimistic about the economy, keeping in mind that coupon rates rise during good economies, we would expect higher yield rates in the short term with optimistic investors having both the expectation that equities will outperform those bonds (so capital is allocated away from bonds) and secondly that interest rates will rise as the economy improves. This is exactly what we see when we look at the 1-mo to 1-yr bonds. Coincidentally, the Fed just announced that interest rates aren't expected to rise this year, so we should see a decrease in the yields of the 1-mo to 1-yr bonds.
- drinane 8y agoHas the yield curve ever gotten really inverted without a subsequent "bend over" recession following? ... IOW... is there a counter example where we can say well "maybe this time is a lot like this time?" ... otherwise sounds like the typical banker control clock in action. Good job monopoly man again! (I posses no knowledge of a better economic system)
- MR4D 8y agoYes. 1965. And then it bounced back and forth for the next 4-5 years before we finally had a recession in 1970. https://fred.stlouisfed.org/graph/?g=nn5r https://fred.stlouisfed.org/graph/?g=nn5r
- throw0101a 8y ago> https://fred.stlouisfed.org/graph/?g=nn5r https://fred.stlouisfed.org/graph/?g=nn5r Note: this graph is for 10Y1Y, while the indicator generally talked about is 10Y3M.
- MR4D 8y agoGood point. I know that 10-2's are popular as well. I used this one because it had the longest history.
- MR4D 8y agoThis should be expected. Given rising FED rates over the last year+, as well as QT (quantitative Tightening, which undoes the QE in place for nearly a decade), these actions are - and this is key - reducing the money supply. It is the reduction of money supply that causes deflation (and therefore lower rates). Technically, a yield curve inversion is an expectation of lower rates in the future, not necessarily lower growth. This is actually extremely important, but widely misunderstood: You can have growth with deflation (and likewise, recession with inflation). To make that point clear, a yield curve inversion is an expectation of interest rates, not necessarily an expectation of lower growth. I expect this will cause all sorts of arguments, but the math is clear. I'll quote the Mises Institute [0] on this: For instance, if the money supply increases by 5% and the quantity of goods increases by 10%, prices will fall by 5%. [0] - https://mises.org/wire/central-banks-shouldnt-fight-deflation https://mises.org/wire/central-banks-shouldnt-fight-deflatio...
- MR4D 8y agoI left off one clarification: it tends to be a good predictor of recessions, but is not perfect. See the inversions for the last half of the 1960's at the St. Louis Fed [0] as a counter-example. [0] - https://fred.stlouisfed.org/graph/?g=nn5r https://fred.stlouisfed.org/graph/?g=nn5r
- jl2718 8y agoTraders think yields will drop. Yields drop because liquidity increases. Liquidity increases because more people want to lend than borrow. A recession lowers the demand for debt, so the price drops and the yields rise. To fight the recession, the fed creates dollars and buys debt with them. The lower supply of and increased demand for debt raises the price, which drops the yield. But this would only happen if the fed was unable to control the recession. Economic expansion also raises the demand for debt. Or it could be the effect of international debt arbitrage. Or balance of trade. Truly I have no idea what traders are thinking. And they could all be wrong. All I know is that this is way more complicated than pattern recognition.
- dafty4 8y agoI was worried for this over the past few days (thanks, YC! ;) ), and reading the thread below see others are as well, but the main solid data I could find against the yield curve predictor (which the original article doesn't mention) is that it doesn't hold up in other countries: https://www.marketwatch.com/story/an-inverted-yield-curve-is-a-recession-indicator-but-only-in-the-us-2018-05-07 https://www.marketwatch.com/story/an-inverted-yield-curve-is... So, if you're a start-up in the U.S. and are worried about the yield curve, just move to Germany, where even though the yield curve is also now inverted there, the historic evidence shows no to weak prediction of a German recession due to an inverted German yield curve! #possibleSpuriousCorrelationFromDataMining