Depending on what measure of short- and long-term rates one uses, the slope has been negative for either six months (using the 3-month Treasury bill and 10-year note) or seven months (using the federal funds rate and 10-year Treasury note). A yield curve that slopes upward, with long rates higher than short ones, encourages financial institutions to borrow short, lend long and pocket the difference, promoting economic growth in the process.
An inverted yield curve has been a harbinger of recession in the past. Unless this time is different -- a popular way of dismissing the spread's stellar history -- real gross domestic product growth of 3.5 percent in the fourth quarter may turn out to be the outlier, not the trend.
This is a really long time for an inversion to continue. And it begs the question, "is this inversion different than past inversions?" After all, 4th quarter GDP came in at 3.5%, and unemployment is low, indicating a recession isn't on the horizon yet. Or it's been averted for awhile.
I don't have an answer for the above statements. What I think is the "this time is different" argument does not play well with historical evidence. As Baum also notes this indicator is not the "hemline indicator". There's a fundamental reason for the inversion. And until the inversion goes away, we should pay attention to the yield curve.
6 comments:
It could be that since the Fed pushed interest rates so low, they ended up having to raise them above the long term for a period to compensate.
A rate cut of a full point would de-invert the curve and restore the historical trend.
But that's what makes an inverted yield curve a nervy thing ... the only thing that would drive a the Fed to a full point rate cut would be a recession.
Global G3 curve isn't inverted. Given that the Yen carry trade has grown to huge proportions you need to consider that short rates in Japan are 25bps.
If you did US 10 year notes versus 10 year JGBs you can lock in a nice spread for a long time.
Personally, I'm deeply suspicious of any economic data coming out of this administration. That includes both the unemployment rate and the GDP.
i wish i could remember exactly where i read it, but the huge inventory reduction stat supposedly means 4Q gdp was really only about 2.6%, but does lay positive groundwork for the 1Q (i think 'cause there's not so much inventory overhang needing to be sold, ie, discounted); so the 4Q wasn't "that" good, and housings' problems could well hit spending sometime in 1Q despite the lowered inventory threshold; we'll know in a few months :-)
I wish you could dig up where you saw that ... it sound confused.
Inventory reduction is disinvestment ... but its only a temporary reduction unless it is a deliberate inventory draw-down.
If inventories are being drawn down, that undermines the impact of consumer spending, because some of that spending is not being replaced.
However, this is much harder to interpret than it once was, because the economy is so open ... with imports heading toward one sixth of GDP, it makes a big difference whether the inventory draw down focuses on imported product or on domestically produced products. Its only the latter that would have the traditional impact of an traditional inventory cycle downturn.
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