2008 again?

[TUK020]

Matt,
On a more serious note, the US market edging towards a yield inversion (not there yet besides a momentary kink in the curve) would seem to imply that the likelihood of a recession is increasing. In other measures the US stock market seems very expensive (CAPE), and this week's Economist is talking about the dollar being overvalued against other leading currencies (Big Mac Index).
All of these add up to me not wanting to increase my exposure to US equities any time soon.
tuk020

[TheMotorcycleBoy]

Matt,
On a more serious note, the US market edging towards a yield inversion (not there yet besides a momentary kink in the curve) would seem to imply that the likelihood of a recession is increasing. In other measures the US stock market seems very expensive (CAPE), and this week's Economist is talking about the dollar being overvalued against other leading currencies (Big Mac Index).
All of these add up to me not wanting to increase my exposure to US equities any time soon.
tuk020

Thanks Tuk,

re. the yield inversion, is that as in what's described on this web page?

https://www.investopedia.com/terms/i/in ... dcurve.asp

Sorry to be slow, just eager to learn more.

Matt

[TUK020]

Thanks Tuk,

re. the yield inversion, is that as in what's described on this web page?

https://www.investopedia.com/terms/i/in ... dcurve.asp

Sorry to be slow, just eager to learn more.

Matt

Matt,
exactly this. In the US market, this has the track record of being the best advance indicator of recessions (but not infallible).
Last Dec, the curve was flattening, and there was a brief microscopic kink between (I think) 2 and 3 year yields. So not an inversion yet. More of an Amber warning light, not Flashing Red.
tuk020

[TheMotorcycleBoy]

Thanks Tuk,

re. the yield inversion, is that as in what's described on this web page?

https://www.investopedia.com/terms/i/in ... dcurve.asp

Sorry to be slow, just eager to learn more.

Matt

Matt,
exactly this. In the US market, this has the track record of being the best advance indicator of recessions (but not infallible).
Last Dec, the curve was flattening, and there was a brief microscopic kink between (I think) 2 and 3 year yields. So not an inversion yet. More of an Amber warning light, not Flashing Red.
tuk020

Thanks again,

Now whilst, I don't expect to receive financial advice from anyone here, suppose that I was to add that we have a World index equity tracker, that I was thinking of topping up some time. Given that this probably equates to a big allocation in US equity, then were I into "feeling bumps", should I pause for a few months, and watch the S&P500 as an indicator, of when to top up - or would that just be a bit silly?

Matt

[dspp]

If it was a big wodge, I'd drip it in. If it was a drip, I'd carry on dripping.
- dspp

[TheMotorcycleBoy]

OOI there's a piccy of our UK gilt yield curve here:

http://www.worldgovernmentbonds.com/cou ... d-kingdom/

It looks our curve is not showing the inversion right now (correct?) but 1 month ago (green line) it said the 1Y maturing bonds were yielding more than 3Y ones......so is that similar to what you said right here:

there was a brief microscopic kink between (I think) 2 and 3 year yields

thanks again

[TheMotorcycleBoy]

If it was a big wodge, I'd drip it in. If it was a drip, I'd carry on dripping.
- dspp

About 1.2k. We've got about 3.5k already in there. I guess that's a drip then.

[TUK020]

OOI there's a piccy of our UK gilt yield curve here:

http://www.worldgovernmentbonds.com/cou ... d-kingdom/

It looks our curve is not showing the inversion right now (correct?) but 1 month ago (green line) it said the 1Y maturing bonds were yielding more than 3Y ones......so is that similar to what you said right here:

thanks again

Matt,
thanks for the link to the UK gilt curve. This is indeed similar to what I was referring to.
I am not sure that the relationship between yield curve inversion and recessions is as proven for the UK - all of the analysis I have seen are for the US. It may be, but I haven't seen it spelt out the same way.
tuk020

[TheMotorcycleBoy]

OOI there's a piccy of our UK gilt yield curve here:

http://www.worldgovernmentbonds.com/cou ... d-kingdom/

It looks our curve is not showing the inversion right now (correct?) but 1 month ago (green line) it said the 1Y maturing bonds were yielding more than 3Y ones......so is that similar to what you said right here:

thanks again

Matt,
thanks for the link to the UK gilt curve. This is indeed similar to what I was referring to.
I am not sure that the relationship between yield curve inversion and recessions is as proven for the UK - all of the analysis I have seen are for the US. It may be, but I haven't seen it spelt out the same way.
tuk020

I imagine that it's similar the World over. My layman interpretation goes thusly:

1. For the "normal" curve, lenders want higher yield for Long bonds, since it's tying up their funds for longer.

2. For the "inverse" curve, the above is still broadly true; however, since lenders are more worried about imminent bankruptcy, they want more yield for the short term. So my *guess* is it ain't so much a dip at medium maturities, but more a elevation at the shortterm.

??

'Course I can appreciate what I've blurted out above re. companies, but I'm puzzled (in the bizarre occurance, in which my above conjecture is true) as to why the same kind of effect occurs for "risk-free" govt. bonds.

Matt

[TUK020]

Now whilst, I don't expect to receive financial advice from anyone here, suppose that I was to add that we have a World index equity tracker, that I was thinking of topping up some time. Given that this probably equates to a big allocation in US equity, then were I into "feeling bumps", should I pause for a few months, and watch the S&P500 as an indicator, of when to top up - or would that just be a bit silly?

Matt

I think you could take one of two alternative views:

A) None of us know what is going to happen. A World Index tracker is about as diversified as you can get. So continue to drip feed into this, and just ride out the bumps

B) Take the view that long term returns are primarily driven by the premium/discount paid to acquire. Therefore shop for the 'cheaper' markets right now. Perhaps have a portfolio of trackers, and in the current market avoid adding to the US, and focus on UK, EU and non-China emerging markets

I think I am leaning towards the more interventionist B), but the big caveat is: If it pays off, don't assume it is down to your brilliance, but recognise there is a huge amount of randomness involved

tall dark expert signing off (and I didn't even ask for a %)
tuk020

[TUK020]

What is happening to the 2-10yr Treasuries yield spread......

Fed Reserve data:
https://ycharts.com/indicators/210_year ... eld_spread
from 'Y Charts'

[WorkShy]

I imagine that it's similar the World over. My layman interpretation goes thusly:
1. For the "normal" curve, lenders want higher yield for Long bonds, since it's tying up their funds for longer.
2. For the "inverse" curve, the above is still broadly true; however, since lenders are more worried about imminent bankruptcy, they want more yield for the short term. So my *guess* is it ain't so much a dip at medium maturities, but more a elevation at the shortterm.
??
'Course I can appreciate what I've blurted out above re. companies, but I'm puzzled (in the bizarre occurance, in which my above conjecture is true) as to why the same kind of effect occurs for "risk-free" govt. bonds.
Matt

It's better to think of the short-end part of the yield curve for risk-free rates as the path of monetary policy over time (say up to 2 years) and the long-end (say 10-years) as a function of long-term inflation expectations, real yield expectations (often a function of growth expectations) and some term premia (a function of volatility expectations). Beyond 10-years, thes spread between 10y and say 30y or 50y will be driven by supply-demand factors and long-term fiscal dynamics.

Goverment bonds are not really an ideal way to visualize this since the curve is often not homogenous and bonds are not really as easily thought about in terms of forward expectations. So it's better to look at interest rate swaps, overnight indexed swaps or interest rate futures to visualize this.

[TUK020]

Goverment bonds are not really an ideal way to visualize this since the curve is often not homogenous and bonds are not really as easily thought about in terms of forward expectations. So it's better to look at interest rate swaps, overnight indexed swaps or interest rate futures to visualize this.

Workshy,
Do interest rate swaps etc also paint a picture that the risk of recession is climbing in the USA?
tuk020

[TheMotorcycleBoy]

I imagine that it's similar the World over. My layman interpretation goes thusly:
1. For the "normal" curve, lenders want higher yield for Long bonds, since it's tying up their funds for longer.
2. For the "inverse" curve, the above is still broadly true; however, since lenders are more worried about imminent bankruptcy, they want more yield for the short term. So my *guess* is it ain't so much a dip at medium maturities, but more a elevation at the shortterm.
??
'Course I can appreciate what I've blurted out above re. companies, but I'm puzzled (in the bizarre occurance, in which my above conjecture is true) as to why the same kind of effect occurs for "risk-free" govt. bonds.
Matt

It's better to think of the short-end part of the yield curve for risk-free rates as the path of monetary policy over time (say up to 2 years) and the long-end (say 10-years) as a function of long-term inflation expectations, real yield expectations (often a function of growth expectations) and some term premia (a function of volatility expectations). Beyond 10-years, thes spread between 10y and say 30y or 50y will be driven by supply-demand factors and long-term fiscal dynamics.

Thanks - very interesting. So regards the inverted spread, say in interest rates, over 1,2,3 years, is this due to central bank nervousness upon any budding entrepreneurs wanting to start-up a new business in the immediate short-term?

That is, a new short term loan is pricier than an existing one to try to discourage new business, but not penalise existing ones too much?

Sorry if it sounds as if I'm clutching at straws here, I'm just trying to map your remark re. "monetary policy" to these movements in (see below) a somewhat abstracted curve:

Goverment bonds are not really an ideal way to visualize this since the curve is often not homogenous and bonds are not really as easily thought about in terms of forward expectations. So it's better to look at interest rate swaps, overnight indexed swaps or interest rate futures to visualize this.

Matt

[WorkShy]

Do interest rate swaps etc also paint a picture that the risk of recession is climbing in the USA?
tuk020

The US 2s/10s spread in swaps is currently 5.7bp, so it's very flat. The Federal Reserve has looked at the ability to predict recessions using yield curve shape. While it found that 2s/10s did seem to have some predictive ability, unsurprisingly the best predictor was the difference between the 3m rate and the 3m rate, 18-months forward. This makes sense since monetary policy is meant to act on a 18-24 month horizon.

Looking at the front-end of the swap curve (or Eurodollar futures contracts since they are equivalent) we can see the probability-weighted expectation is for around 8bp of further tightening by Dec-19 (so a 33% chance of one more 25bp hike), followed by around 20bp of cuts, basing in Sep-2021 (80% chance of one 25bp cut). A fortnight ago, at it's most bearish, the market was pricing more like one 25bp cut by Dec-19, followed by another cut by in 2020/21, so if anything the fear of recession has somewhat receded.

At the moment you might interpret the current curve a basically saying it's undecided between further expansion and a slowdown/recession.

[odysseus2000]

Hi Matt,

Would you buy a new car that was designed 50 years ago?

Your analysis is based on ideas and techniques like moving average cross that were useful many years ago and which are now obsolete. If you look at the 20 year prices of the ten year note with the 2 and 10 simple monthly moving average approximating the 50 and 200 day simple moving daily averages you see several death cross, but so what?:

https://twitter.com/0_ody/status/1087302483523891202

Once few had real time quotes, there were no pre and post markets and no derivatives. All of that has now changed and this has required entirely new tactics to take advantage of the opportunities.

One can likely still make money with long term buy and hold but that is what it means, i.e. put the money in that you will not need for decades and ignore it.

Much of the financial world now operates on the time scales of a day whereas much of the media is wedded to investment tactics that were useful decades ago and which are now of little practical use. All the big investors use sophisticated techniques to manage money on a daily basis and if you want to learn what is done you will need to get away from the mug punter media stuff and learn how all of these things operate in the modern world.

There are now entire outfits geared to fake news and manipulating markets as one saw last week with the sudden rise in the S&P because there was a tariff deal with China. This made some traders large amounts of money and cost those who were short similarly big amounts of money.

I was on a virtual trading desk last week (which I pay for), when one of the senior traders was talking of some of his best months when he had made over a million dollars in trading profits. He is paid to trade and make money but that should give you some idea of what can be made and lost in very short time periods by folk who are good at the modern trading environment. You won’t find out about this kind of stuff from the news papers, TV or bulletin boards. Here we are all tiny folk who have time to waste on stuff that gives us a bit of a feeling of being part of the financial world but be under no illusion we are all tiny folk, the big guys have no time or interest in this kind of chatter.

Regards,

[TheMotorcycleBoy]

Hi Matt,

Would you buy a new car that was designed 50 years ago?

Your analysis is based on ideas and techniques like moving average cross that were useful many years ago and which are now obsolete. If you look at the 20 year prices of the ten year note with the 2 and 10 simple monthly moving average approximating the 50 and 200 day simple moving daily averages you see several death cross, but so what?:

https://twitter.com/0_ody/status/1087302483523891202

Once few had real time quotes, there were no pre and post markets and no derivatives. All of that has now changed and this has required entirely new tactics to take advantage of the opportunities.

One can likely still make money with long term buy and hold but that is what it means, i.e. put the money in that you will not need for decades and ignore it.

Much of the financial world now operates on the time scales of a day whereas much of the media is wedded to investment tactics that were useful decades ago and which are now of little practical use. All the big investors use sophisticated techniques to manage money on a daily basis and if you want to learn what is done you will need to get away from the mug punter media stuff and learn how all of these things operate in the modern world.

There are now entire outfits geared to fake news and manipulating markets as one saw last week with the sudden rise in the S&P because there was a tariff deal with China. This made some traders large amounts of money and cost those who were short similarly big amounts of money.

I was on a virtual trading desk last week (which I pay for), when one of the senior traders was talking of some of his best months when he had made over a million dollars in trading profits. He is paid to trade and make money but that should give you some idea of what can be made and lost in very short time periods by folk who are good at the modern trading environment. You won’t find out about this kind of stuff from the news papers, TV or bulletin boards. Here we are all tiny folk who have time to waste on stuff that gives us a bit of a feeling of being part of the financial world but be under no illusion we are all tiny folk, the big guys have no time or interest in this kind of chatter.

Regards,

?

[dspp]

TMB,

I'll be honest: o2000 is largely correct.

Unless you are into very long term buy-and-hold of stuff that will not ever under any circumstances disappear on you terminally overnight, then he is correct. And the only things I know that will stand a chance of lasting through the very serious noise, are highly diversified index trackers. Everything else needs to be watched like a hawk. And in everything else the little bit you see is the minor waves on the surface, and far bigger stuff is happening in the depths, and quite a lot is folk deliberately seeking to distort the market, and likely as not they are not your friend. And you are their lunch.

So, much as I think what you are doing in trying to understand accounts & etc is well worth doing, be under no illusions that it is anything other than lesson #1 on day #1.

regards,
dspp

[TheMotorcycleBoy]

Whilst the advice is interesting.

And you are their lunch.

The melodrama is out of place.

[WorkShy]

Thanks - very interesting. So regards the inverted spread, say in interest rates, over 1,2,3 years, is this due to central bank nervousness upon any budding entrepreneurs wanting to start-up a new business in the immediate short-term?
That is, a new short term loan is pricier than an existing one to try to discourage new business, but not penalise existing ones too much?
Sorry if it sounds as if I'm clutching at straws here, I'm just trying to map your remark re. "monetary policy" to these movements in (see below) a somewhat abstracted curve:
Matt

I'm have to be honest I'm not quite sure what your are asking (I may be being dense).

At the start of a typical tightening cycle, the front-end of the yield curve, say 2-year, is at a low level since the prior move was probably a cutting cycle that brought policy rates down. The 10-year point of the yield curve, however, will not be so low since long-dated yields will be driven by longer-term views on inflation and real yields. As a result, the yield curve will be relatively steep.
1. As the central bank raises rates, it takes away accomodative monetary policy. The front-end of the curve rises. Longer-dated yields, however, rise less since they are being driven by much longer-term views of real yields and inflation which have not altered. The curve bear flattens.
2. At some point, the market may perceive that the central bank may be tightening too much. It will price out further tightening, so the the front-end (2-year) stops moving higher. Concern that the economy may slowdown and inflation fall may cause longer dated yields to fall. The curve bull flattens.
3. If the market is correct, and a slowdown/recession happens and inflation falls, then at some point the central bank will respond by cutting interest rates. The front-end now falls rapidly, while the long-end, which has already priced this concern, falls far less. The curve bull steepens.
4. Finally, the market may percieve that the central bank has cut too much and will stop. The front-end stays unchanged, but the long-end yields start to rise on the back of higher inflation and growth expectations. The curve bear steepens.
And we are back to to where we started with front-end rates low and a steep curve... and the policy cycle starts again.

Over most of 2016-18 we were in phase 1. In November/December, the curve started to act like phase 2. It's not clear whether this is just a short term swoon and we revert back to phase 1 or we stay in phase 2.

Also note I'm horribly oversimplifying. Looking at the yield curve (say 2y, 5y or 10y) in "par space" or "spot space" is less useful than looking at the yield curve in "forward space" but this would require some understanding of how derivatives like interest rate swaps can be decomposed into forward starting strips of Libor expectations.