US yield curve steepest since 1980

[DRumsfeld2000]

Interesting that the recent auction did not go too well. Perhaps it is something to doing with the Democrats saying that they will increase the US debt ceiling by a massive $1.8trl up from the current $12.1trl. How long will the bond market accept this when it is obvious that the US cannot grow itself out of the debt mountain, especially when you add in the unfunded liabilities which were recently assessed by Sprott Asset Management at over $118trl.


http://globaleconomicanalysis.blogspot.com/

[friendly_jacek]

Re: US yield curve steepest since 1980

Interesting that the recent auction did not go too well. Perhaps it is something to doing with the Democrats saying that they will increase the US debt ceiling by a massive $1.8trl up from the current $12.1trl. How long will the bond market accept this when it is obvious that the US cannot grow itself out of the debt mountain, especially when you add in the unfunded liabilities which were recently assessed by Sprott Asset Management at over $118trl.


http://globaleconomicanalysis.blogspot.com/

Aren't steep curve a sign of recovery? He had that thoughout most of 2003 after all.

[metalman]

Re: US yield curve steepest since 1980

Aren't steep curve a sign of recovery? He had that thoughout most of 2003 after all.

as usual, mish has no clue as to what he's talking about.

inverted yield curve (short rates > long rates) = recession on the way.

steep yield curve (long rates mucho > short rates) = recovery on the way.

yield curve is steeper than ever since 1983 after the recession ended, not 1980 before it started...

http://www.smartmoney.com/investing/...ld-curve-7923/

[Quincy K]

Re: US yield curve steepest since 1980

Could Pimco be wrong?


When was the last time they were on the wrong side of the trade in a long-term play?

[grapejelly]

Re: US yield curve steepest since 1980

great news for banks. They can borrow from the fed for 0% and lend on the long side at 3% or 4% and make an instant "profit" with zero risk.

Gee, maybe this is the exact reason things are set up this way in the banking world? You think?

[metalman]

Re: US yield curve steepest since 1980

great news for banks. They can borrow from the fed for 0% and lend on the long side at 3% or 4% and make an instant "profit" with zero risk.

Gee, maybe this is the exact reason things are set up this way in the banking world? You think?

[Chris]

Re: US yield curve steepest since 1980

I love this site. Everyone can take. Nobody throws a hissy-fit (except from Lukester).

[metalman]

Re: US yield curve steepest since 1980

I love this site. Everyone can take. Nobody throws a hissy-fit (except from Lukester).

grape knows i mean the benefits of the steep yield curve to our banker-owned gov't are obvious to itulipers, tho a mystery to mish.

[ASH]

Re: US yield curve steepest since 1980

great news for banks. They can borrow from the fed for 0% and lend on the long side at 3% or 4% and make an instant "profit" with zero risk.

Hey Grape... is the 0% to which you refer the federal funds rate?

My understanding is that when banks borrow directly from the Fed, in programs such as TALF, they are paying interest rates above 0% that vary depending upon the collateral. For instance, from the link, I see that when the collateral for a loan from the Fed under this program is commercial mortgages, the interest rate charged is the 3-year LIBOR swap rate + 100 bps.

If you are referring to the 0% federal funds rate, then technically the banks aren't borrowing from the Fed -- they are borrowing reserves from other banks. Of course, the Fed endeavors to flood the system with enough reserves so that banks are willing to loan overnight at 0% interest, but technically the loans are not from the Fed. Also, although I know banks borrow short to lend long, it isn't immediately obvious to me that overnight borrowing is supplying the capital to purchase long government bonds.

None of this is to dispute that the Fed has made lots of short term liquidity available, from which the banks can earn risk-free (*) returns by lending long. But it isn't clear to me that they are actually borrowing from the Fed at 0%. Am I missing the mechanism you had in mind?

(*) That's free of the risk of default; not free of the risk of loss of purchasing power.

[jacobdcoates]

Re: US yield curve steepest since 1980

Ash,

All a bank has to do is lend out enough reserves to other banks, that it then is short of the "required" reserves and since the system is so short on capital, basically all the banks can do this. It then goes to the Fed and says loan me some high powered money I'm short on my reserves.

Banks don't care about purchasing power. They only care about nominal. If the bank loans you a million dollars and then there is 1000000% inflation. The bank still shows a profit when you payback the loan in full with devalued dollars. So the trade is risk free from the banks point of view.

[Spartacus]

Re: US yield curve steepest since 1980

we need a graphic of a constipated person complaining to Sherlock Holmes

"no **** Sherlock"

[DRumsfeld2000]

Re: US yield curve steepest since 1980

Friendly Jacek

What you are perhaps forgetting is that the Fed has used $300bn to buy bonds to keep the yield curve low in the past. This was done to keep mortgages low. Without that money the yield curve would have been much steeper at a time of a housing market crash, not at a time of economic growth. This rising yield curve will also coincide with a new wave of upward mortgage adjustments, undermining the housing market further.

The most likely reason that the yield curve is rising is that the bond vigilanties will not long term fund the US deficit at low yield levels. You also have to remember that in 2010 the US has to borrow new or role over existing short term debt of $3.5trl.

The rising yield curve is not a sign of economic growth, it is a sign of serious concerns about US debt.

[grapejelly]

Re: US yield curve steepest since 1980

Hey Grape... is the 0% to which you refer the federal funds rate?

My understanding is that when banks borrow directly from the Fed, in programs such as TALF, they are paying interest rates above 0% that vary depending upon the collateral. For instance, from the link, I see that when the collateral for a loan from the Fed under this program is commercial mortgages, the interest rate charged is the 3-year LIBOR swap rate + 100 bps.

If you are referring to the 0% federal funds rate, then technically the banks aren't borrowing from the Fed -- they are borrowing reserves from other banks. Of course, the Fed endeavors to flood the system with enough reserves so that banks are willing to loan overnight at 0% interest, but technically the loans are not from the Fed. Also, although I know banks borrow short to lend long, it isn't immediately obvious to me that overnight borrowing is supplying the capital to purchase long government bonds.

None of this is to dispute that the Fed has made lots of short term liquidity available, from which the banks can earn risk-free (*) returns by lending long. But it isn't clear to me that they are actually borrowing from the Fed at 0%. Am I missing the mechanism you had in mind?

(*) That's free of the risk of default; not free of the risk of loss of purchasing power.

pretty much the mechanism I am talking about. The Fed has ballooned bank reserves and banks are the biggest buyers of long treasury bonds.

[WildspitzE]

Re: US yield curve steepest since 1980

not only that, but they pay interest on the excess reserves. further reducing the cost basis (or increasing the spread).

also, don't forget the discount window (primary credit, lending to bank not intra banks).

[icm63]

Re: US yield curve steepest since 1980

inverted yield curve (short rates > long rates) = recession on the way.

steep yield curve (long rates mucho > short rates) = recovery on the way.

Well the curve has nothing to do with economic performance, it has more to do with being kind or unkind to the banks.

BANKS borrow short and lend long, so if there is a steep yield curve that means that banks are borrowing at 0.25% and lending at 4% and making easy money on new and existing loans .

Inverted yield curve means the banks are borrowing at 4.10% and lending at 4% making money is not so easy.

The word confidence comes to play as to 'will the Banks lend to the consumer', it does not really matter what the yield curve status is.

Greed is the better word..If banks can smell money they will lend..to anyone..