TIPS yield curve predicting near-term disinflation

[Munger]

The TIPS curve has become inverted

The US inflation indexed treasury curve (TIPS curve) has inverted sharply in the short end. The one-year TIPS yield went from negative 2.5% to zero in a matter of four months. The one-year treasury (nominal) yield on the other hand has held fairly steady near zero (between 12bp and 20bp over the past 4 months). That means that the market is now pricing near zero percent inflation over the next year (down from over 2.6% expected just 4 months ago!) - as near-term inflation expectations collapse. We haven't seen this since 2009.

TIPS curve now, a month ago, and 4 months ago

One could argue that this is a positive development for the US consumer because it could mean price stability. However this move in TIPS certainly raises the risk of near-term deflation, driven by weak demand growth. And deflation is notoriously difficult to get under control. This feels (though only in the near term) a bit like Japan, a nation quite familiar with zero to negative inflation expectations.

http://soberlook.com/2012/06/tips-curve-has-inverted.html

[rjwjr]

Re: TIPS yield curve predicting near-term disinflation

Two words...Gas Prices.

Nothing says disinflation to the sheeple like declining gas prices.

[globaleconomicollaps]

Re: TIPS yield curve predicting near-term disinflation

The TIPS curve has become inverted

The US inflation indexed treasury curve (TIPS curve) has inverted sharply in the short end. The one-year TIPS yield went from negative 2.5% to zero in a matter of four months. The one-year treasury (nominal) yield on the other hand has held fairly steady near zero (between 12bp and 20bp over the past 4 months). That means that the market is now pricing near zero percent inflation over the next year (down from over 2.6% expected just 4 months ago!) - as near-term inflation expectations collapse. We haven't seen this since 2009.



One could argue that this is a positive development for the US consumer because it could mean price stability. However this move in TIPS certainly raises the risk of near-term deflation, driven by weak demand growth. And deflation is notoriously difficult to get under control. This feels (though only in the near term) a bit like Japan, a nation quite familiar with zero to negative inflation expectations.

http://soberlook.com/2012/06/tips-curve-has-inverted.html

http://www.zerohedge.com/news/here-c...rs-more-action
Here Comes The Hilsenrath Leak: "Fed Considers More Action"
By Tyler Durden
Created 06/05/2012 - 19:29
Tyler Durden's picture [1]
Submitted by Tyler Durden [1] on 06/05/2012 19:29 -0400


Three months ago, just when things looked like they were about to turn south, the Fed's trusty mouthpiece, Jon Hilsenrath, made it clear [12]that the market can stop falling as the Fed was "considering" sterilized QE, or more Twist, something we explained later would be impossible [13]in the current format as the Fed would run out of sub 3 Year paper by the end of August. It did however halt the drop in stocks for a month or two until Europe became permanently unfixed. Hilsenrath then cralwed back into his WSJ cubicle. Until today: two weeks before the all critical June 20 FOMC meeting, the faithful Fed scribe has been charged with his latest leak commission: "Fed Considers More Action Amid New Recovery Doubts." And as it has been leaked (now that people have actually done the appropriate math), so it shall be.

From the WSJ [14]:

Disappointing U.S. economic data, new strains in financial markets and deepening worries about Europe's fiscal crisis have prompted a shift at the Federal Reserve, putting back on the table the possibility of action to spur the recovery.

Such action seemed highly unlikely at the central bank's April meeting, when forecasts for growth and employment were brightening. At their policy meeting this month, Fed officials will weigh whether the U.S. economic outlook is deteriorating enough to justify new measures to boost growth, according to interviews and Fed speeches.

The Fed's next meeting, June 19 and 20, could be too soon for conclusive decisions. Fed policy makers have many unanswered questions and have had trouble forming a consensus in the past. Top Fed officials have said that they would support new measures if they became convinced the U.S. wasn't making progress on bringing down unemployment. Recent disappointing employment reports have raised this possibility, but the data might be a temporary blip. Moreover, the Fed's options for more easing are sure to stir internal resistance at the central bank if they are considered.

Their options include doing nothing and continuing to assess the economic outlook—or more strongly signaling a willingness to act later if the outlook more clearly worsens. Fed policy makers could take a small precautionary measure, like extending for a short period its "Operation Twist" program—in which the Fed is selling short-term securities and using the proceeds to buy long-term securities. Or, policy makers could take bolder action such as launching another large round of bond purchases if they become convinced of a significant slowdown.

Another question: does Twist end in 25 days, or will the market have a violent revulsion to a world without constant central-planner artificial "flow" creation (because as first noted here months ago, only [15]Nobel prize-winning economists still think "stock" is even remotely relevant).

Mr. Bernanke must decide whether to let the program end. The Fed has enough short-term securities left to extend it for a few months [ZH: good to see that Hilsenrath is finally doing the math that refuted his own articles 3 months ago] as a precaution while it watches how the economy develops. If officials become more convinced about a growth slowdown they could expand the Twist program or launch another round of securities purchases—an approach known as quantitative easing—to try to boost growth.

But the most important question: with the 10 Year already at the idiotic 1.50% level, does anyone seriously believe that more risk taking will be provoked by pushing yields to 1.40%, or 1.30%? Or how about 0.00%? In fact, why doesn't Bernanke just pull a Bank of Japan, and stop beating around the bush, instead buying up all the SPY, and REITs he can find. One ETF he doesn't have to buy will be GLD: that one will go up on its own. Very, very fast.

Finally, as Zero Hedge explained patiently last night [16], while the economists, pundits, and sellsiders all have their self-serving theories, the bond market, at least for now, has spoken, and sees not more LSAP but a simple expansion of Twist from 0-3 to 0-4 year maturity sales: an outcome which to the market will be the worst of all worlds.

[charliebrown]

Re: TIPS yield curve predicting near-term disinflation

Does Bernanke's papers lead to a LTRO U.S. Style???

http://www.financialsense.com/contri...ext-dollar-qe3

In this article Alex Merk sites Bernnanke's words as saying the fed could purchase large amounts of private debt via the discount window, a.k.a BAC loan book.
BAC price action seems to confirm that today.

• Alternatively, the Fed could find other ways of injecting money into the system – for example, by making low-interest rate loans to banks or cooperating with the fiscal authorities
• If lowering yields on longer-dated Treasury securities proved insufficient to restart spending, however, the Fed might next consider attempting to influence directly the yields on privately issued securities… the Fed does have broad powers to lend to the private sector indirectly via banks, through the discount window.
• The Fed could offer fixed-term loans to banks at low or zero interest, with a wide range of private assets (including, amongst others, corporate bonds, commercial paper, bank loans, and mortgages) deemed eligible as collateral.

[Starving Steve]

Re: TIPS yield curve predicting near-term disinflation

No, not just gasoline prices, but house prices have dropped, and I don't mean house prices in the Midwest but house prices in California. I don't just mean house prices in Bakersfield nor Chico nor Thermal nor Barstow, but I mean choice homes in and around Silicon Valley, San Francisco-Oakland-Berkeley, LA, San Diego. No, this is not a looky-feely de-flation, but this is a real de-flation. Maybe Bernanke is doing the right thing by playing/advertising inflation but quietly de-flating the economy, slowly. That would be a brilliant move on the part of the Fed.

And house prices have not dropped 10% or 20% but 40 and 50%. Obviously, title problems are the reason for the drop in real estate, but maybe a well managed de-flation is also helping things in real estate de-flate.

Now if we can kick the butts of the damn environmentalists/solar power/ and windmill morons and go solidly back into coal+oil+natural gas+ nuclear, then we could drive utility costs down sharply, back to next-to-nothing, the way utility costs used to be. But that means telling the eco-frauds ( the Sierra Club, Greenpeace, Stop Global Warming, the Tahoe Valley Regional Planning Agency, the EPA and that whole bunch ) to go to hell.

We can have a very lovely de-flation if we demand it now.

And by the way, on the subject of driving-away the environmentalists and helping to create a lower cost of living, the mean annual temperature at San Francisco for 2011/2012 is well BELOW NORMAL, just as I said it would be. The final figures will be posted on the National Weather Service web site for San Francisco International Airport on July 1, 2012. But the heating requirements data is already posted on their web site showing a large increase above normal (2736 degree days versus a normal of 2568 degree days as of June 5th.) and that extra 168 degree-day heating requirement was due to the chill from the cyclical La Nina cold on the West Coast. And when the West Coast is colder than normal, naturally the East Coast and the Midwest go warmer than normal.

Go look at the daily high/low temperature graph on their web page ( its lower-righthand corner ) and it shows almost no warming since early spring at San Francisco; again, this is due to the La Nina chill.

www.wrh.noaa.gov/mtr/

[ER59]

Re: TIPS yield curve predicting near-term disinflation

No, not just gasoline prices, but house prices have dropped, and I don't mean house prices in the Midwest but house prices in California. I don't just mean house prices in Bakersfield nor Chico nor Thermal nor Barstow, but I mean choice homes in and around Silicon Valley, San Francisco-Oakland-Berkeley, LA, San Diego. .

Startving Steve,
I've been looking to buy something in Los Angeles since last October, and all I am seeing are the same overpriced properties, with prices steadily going up and up.

[jiimbergin]

Re: TIPS yield curve predicting near-term disinflation

A deflationary period is what Finster(and Bart) has been projecting in his threads.

[Starving Steve]

Re: TIPS yield curve predicting near-term disinflation

Startving Steve,
I've been looking to buy something in Los Angeles since last October, and all I am seeing are the same overpriced properties, with prices steadily going up and up.

If you can get 100% clear and certain title to properties and guaranteed by the State or some deep-pocket entity somehow, the cheapest gorgeous homes in my lifetime are available in and around Silicon Valley, like in the Santa Cruz Mtns, like in Morgan Hill, San Martin, Gilroy, Santa Cruz, Scott's Valley, Coyote, New Almaden quicksilver mines, etc. Gilroy is less.... Hollister much less. But prime Los Gatos is about $150K more than discussed in the next paragraph.

By cheap, I mean 2100+ square foot homes with those lovely adobe roof-titles that the pigeons love to nest in, plus stucco sides, gorgeous landscaping, in-ground sprinklers, lovely stone fireplace, granite counter kitchen, granite counter master-bathroom, beautiful wide twisting staircase to the second floor, stone floors, nice carpets, vaulted ceilings, bay windows, central air, etc. These can now be had for $450,000 cash--- if you want to take the risk of title. The lots are small but the neighbourhoods are gorgeous, and you can walk to the grocery store and shopping centre, etc.

You can buy choice Oakland Hills, Walnut Creek, Lafayette, Concord, Livermore, etc. Or you can go down the coast to Monterey. Cheap! Monterey/Carmel used to cost a million or more, but those days are now gone. $450K cash, give or take, and you own some kind of home, possibly a nice home now.

Why put up with Victoria where your septic crew breaks & enters your kitchen, grabs you and shoves you and your head (after brain surgery) into your kitchen wall, the RCMP dismisses your call for help, everyone thinks you are crazy, Victoria General Hospital holds a secret (senior citizen) court for you to demand that you be sentenced to a nursing home, and the same sort of thing happened to Beth, and both Harrys in your hospital room. Welcome to the new Canada--- except for winter which is never far off and never has shown any sign of so-called, global warming or mercy.

The problem is the tiny issue of house title in California: Who has title; who can prove it; who can plunk their house-title down onto a counter when needed, and who with deep-pockets will stand good for your house-title and everyone else's house-title or land-title or access-roads or utility right-of-ways around you in your neighbourhood?

Which is worse: a.) living in California with creative financing and imaginary real estate titles, or b.) living in British Columbia now run by gangsters and an RCMP that no longer cares?

[cityqat]

Re: TIPS yield curve predicting near-term disinflation

Why put up with Victoria where your septic crew breaks & enters your kitchen, grabs you and shoves you and your head (after brain surgery) into your kitchen wall, the RCMP dismisses your call for help, everyone thinks you are crazy, Victoria General Hospital holds a secret (senior citizen) court for you to demand that you be sentenced to a nursing home, and the same sort of thing happened to Beth, and both Harrys in your hospital room. Welcome to the new Canada--- except for winter which is never far off and never has shown any sign of so-called, global warming or mercy.

Which is worse: a.) living in California with creative financing and imaginary real estate titles, or b.) living in British Columbia now run by gangsters and an RCMP that no longer cares?

Dad - please read my post in your last thread that talks about 'have you ever heard of the septic crew knocking at your door and knocking your head in' - yadda yadda. I am worried about you.

love,
your daughter, Nancy (cityqat)

[Starving Steve]

Re: TIPS yield curve predicting near-term disinflation

Forget L.A. Silicon Valley area is great if you can get clear title..... Now, what about the $5k drop in my bank acct over spring? Being a complete moron, I do know that money doesn't quite evaporate, at least not in physics. And what about the gangsters coming from the meeting at the TD bank? The HSBC bank in Langford seems to know plenty about the strange going-ons at the TD bank across the street because his bank is getting refugees dribbling in frequently from the TD Bank where you arranged our 5 o'clock meeting. His refugees know plenty about that particular TD bank, and they are moving their accounts, both new and old, across the street....... Isn't that odd? Ever hear of such a town like Victoria? People can no longer trust their bankers? The RCMP doesn't know a thing. Everybody else knows about the happenings in Victoria, but the RCMP doesn't know a thing? Even the CBC knows, but the RCMP is in the dark? Everyone in Canada knows Victoria smells, but the RCMP is more interested in enforcing 20 mph speed limits on highways than in other matters......

[photon555]

Re: TIPS yield curve predicting near-term disinflation

As a practical matter what does this mean for mortgage interest rates? If someone is buying a house in the near future is it better to pay for a rate lock or let it ride hoping it stays flat or even goes down?

[lektrode]

Re: TIPS yield curve predicting near-term disinflation

As a practical matter what does this mean for mortgage interest rates? If someone is buying a house in the near future is it better to pay for a rate lock or let it ride hoping it stays flat or even goes down?

as a practical matter, take a look at this (todays rates at one of the big banks in HNL)

30-yr Fixed Rate	3.400%	2.000	3.58%	$4.42 per $1,000* borrowed
30-yr Fixed Rate	3.590%	1.000	3.69%	$4.49 per $1,000* borrowed
30-yr Fixed Rate	3.690%	0.000	3.71%	$4.56 per$1 ,000* borrowed

2.625%

2.000

2.95%

$6.73 per $1,000* borrowed

course if a real live warm bodied working type actually tried to get that rate...

[don]

Re: TIPS yield curve predicting near-term disinflation

A few notes on the "historically low mortgage rate" world.

Points and fees must be carefully understood. Some lenders make up for the low rate with upfront costs.

Succeeding at landing the all-time lowest rate is a two edged sword. It guarantees that in the future the rate will be higher. If for some reason you need to pull out any equity - via your initial down payment, sweat equity or market inflation - you will be paying more, maybe a lot more.

Keep in mind why we're seeing these artificially maintained low rates - to prop up housing bubble pricing as much as the tumbling market will allow. Rates and prices are a teeter totter - when one goes up, the other goes down. As EJ pointed out long ago, it's better to pay a higher rate for a lower priced item than the reverse. That should be kept in mind when a mortgage rate increase appears likely.

[cityqat]

Re: TIPS yield curve predicting near-term disinflation

Now, what about the $5k drop in my bank acct over spring?

*You never had a $5k drop during the spring. I checked for you - no drop. You didn't put all that much money in there before you left, so if there is less, try to make sure that your direct debit payments for your old house are not still being withdrawn.*

And what about the gangsters coming from the meeting at the TD bank?

*These women are *not* gangsters. They are employees of the bank.*

The HSBC bank in Langford seems to know plenty about the strange going-ons at the TD bank across the street because his bank is getting refugees dribbling in frequently from the TD Bank where you arranged our 5 o'clock meeting.

*This bank was YOUR bank. You've been dealing with them for decades. Please, stop these false accusations. I arranged the meeting at YOUR request.*

[FRED]

Re: TIPS yield curve predicting near-term disinflation

*You never had a $5k drop during the spring. I checked for you - no drop. You didn't put all that much money in there before you left, so if there is less, try to make sure that your direct debit payments for your old house are not still being withdrawn.*





*These women are *not* gangsters. They are employees of the bank.*






*This bank was YOUR bank. You've been dealing with them for decades. Please, stop these false accusations. I arranged the meeting at YOUR request.*

cityqat,

Sorry to hear that your father suffered a health event recently. Please let us know if there is anything we at iTulip and the iTulip community can do to assist.

Starving Steve,

For the time being, we are going to restrict your access to the forums until you indicate to us that you are feeling better. We ask that you and your daughter continue your family discussions offline via private messaging so that members can continue various forum discussions on-topic. Thank you and best to you.