Wednesday, June 1, 2016

The Message From the Flattening Yield Curve

From Across the Curve:
Ed Yardeni has been around for a long time(for that matter so have I). I think that he is the fellow who coined the term “bond vigilantes” in the 1980s. Back in the day he was the chief economist at the venerable investment bank EFHutton (defunct). He has digitally penned an interesting piece on the message conveyed by the flattening of the 2s 1os spread in Treasury space.
Via Dr. Ed Yardeni and a tip of the hat to Steve Feiss at Government Perspectives:

Saturday, May 28, 2016

US Yield Curve: Global Yellow Light?
https://3.bp.blogspot.com/-x0lgUR2Y9K0/V0o-pRqT-wI/AAAAAAAAJHg/b7CI-xmP7901FoKirHQ_Jmka94Agl-1BACLcB/s1600/fig1.gif
The spread between the 10-year US Treasury bond yield and the federal funds rate is one of the 10 components of the Index of Leading Economic Indicators compiled monthly by the Conference Board. There is no trend in this series, which tends to cycle around zero. It is widely deemed to be one of the more accurate business-cycle indicators, predicting economic growth when it is positive and a recession when it is negative. The spread does tend to lead the y/y growth cycle in the Index of Coincident Economic Indicators.

Of course, the spread is also available on a daily basis. A more sensitive version of this leading indicator is the spread between the 10-year Treasury yield and the 2-year Treasury yield. That’s because the latter tends to anticipate moves in the federal funds rate, which is managed by the Fed. Currently, the spread is still positive but narrowing. It was 96bps on Friday, May 20, down from the most recent cyclical high of 266bps during December 31, 2013.

Interestingly, the spread has been narrowing as the Fed has been moving toward normalizing monetary policy. When QE was terminated at the end of October 2014, the spread was 185bps. It was down to 128bps on December 16, 2015, when the Fed hiked the federal funds rate by 25bps. It was down to 93bps following the release on Wednesday, May 18, of April’s FOMC minutes, which heightened expectations of a rate hike at the June 14-15 meeting of the FOMC....MORE