US Treasuries - If it is not Confusion, nor Panic, then What’s it?

[MacroSA]

Hi everyone,

Attached is a snapshot of the changes on US Treasuries yields for all different maturities.
The snapshot was taken at 20:00 UTC time, 19.Mar.2019.

The Yield on the US.1Y.T increased by 0.65%
While the Yield on the US.2Y.T decreased by 0.68%

The maturity difference between these two instruments is just one year.
If we eliminated the confusion and panic as potential reasons, then what would cause such a noticeable divergence?


Thanks,

[dcarrigg]

Re: US Treasuries - If it is not Confusion, nor Panic, then What’s it?

Might figure some big bets are being placed on a recession beginning in the 6-12 month window, with presumed fed intervention and rate cuts to follow...

[MacroSA]

Re: US Treasuries - If it is not Confusion, nor Panic, then What’s it?

Outstanding Dcarrigg,

If we would take an identical bet in our stock portfolio, and if we review the correlation between recessions and the stock market, when will be the next top in the S&P500 (SPX)?

[vt]

Re: US Treasuries - If it is not Confusion, nor Panic, then What’s it?

As EJ stated, the Fed can't handle a recession.

So a combination of more spending, and the Fed cutting rates to prevent the recession would happen before we got too close.

Don't forget we have a political economy. We are in the third and fourth term of a President. The decline last year fit the political pattern perfectly.
If the pattern continues we may avoid a recession for a couple of years and see some upside over the next two years.

[dcarrigg]

Re: US Treasuries - If it is not Confusion, nor Panic, then What’s it?

Sometime between now and soon. Yield inverted even earlier yesterday/today. Now the 3mo are paying higher yields than 1yr. 3 and 5 yr rates dropped pretty hard. FT picked up on it. I'm no oracle at timing. But things are starting to look dicier.

[MacroSA]

Re: US Treasuries - If it is not Confusion, nor Panic, then What’s it?

Thank you Dcarrigg for the insight. I reached the same conclusion.
I summarized it yesterday and post it today in the FED Balance Sheet thread.

[dcarrigg]

Re: US Treasuries - If it is not Confusion, nor Panic, then What’s it?

Thank you Dcarrigg for the insight. I reached the same conclusion.
I summarized it yesterday and post it today in the FED Balance Sheet thread.

Yup, your timing was prescient. 3mo & 10yr inverted today. I'm no TA guy, but I think there are good structural reasons why this always happens going into a recession.

[touchring]

Re: US Treasuries - If it is not Confusion, nor Panic, then What’s it?

As EJ stated, the Fed can't handle a recession.

Didn't catch that. The Fed can stop raising rates or even start QE4? Wouldn't that "handle" a recession?

[jk]

Re: US Treasuries - If it is not Confusion, nor Panic, then What’s it?

Didn't catch that. The Fed can stop raising rates or even start QE4? Wouldn't that "handle" a recession?

i think we're going to see. it may be that the recession has already started but we'll only know it in retrospect when the nber finally figures it out.

[dcarrigg]

Re: US Treasuries - If it is not Confusion, nor Panic, then What’s it?

i think we're going to see. it may be that the recession has already started but we'll only know it in retrospect when the nber finally figures it out.

Iirc, usually the timing on these things is recession between 6mos and 2years after a week of 3mo/10yr inversion. Seems like the typical past timing was something like 1 or 2 quarters of inversion, followed by a normalization of the curve that coincides with a downswing in equities that might last a few quarters before the official recession kicks in, or might not. It's a real fuzzy timeline, but roughly coincides with the late 2019 to early 2020 recession some of the big economists have been calling, although some like UCLA's Anderson forecast are pointing at late 2020, so ymmv. Important to realize that the Fed itself uses YC as a leading indicator, so even if you don't buy the structural arguments (which pre-date the Fed), you might think of it as self-fulfilling.

[vt]

Re: US Treasuries - If it is not Confusion, nor Panic, then What’s it?

Didn't catch that. The Fed can stop raising rates or even start QE4? Wouldn't that "handle" a recession?

EJ said in his latest that the Fed would even buy bonds as before to prevent a recession.

[vt]

Re: US Treasuries - If it is not Confusion, nor Panic, then What’s it?

Markets discount.

I feel that 2018 was discounting the slowdown we are seeing now. It may have even been masked by corporate buybacks and cuts in corporate taxes.

The deep correction in the last three months was a kick in the "Fed is behind" that they better stop raising rates and selling bonds. EJ called this loud in clear right after Thanksgiving. The market also probably realized China trade talks wouldn't be resolved.

All central banks are back to risk on. Think of 2018 as 2015 all over. EJ in January 2014 had an article with a chart showing the 10 year Treasury going from 3% down to 1.6%; precisely what happened.

Personally I don't feel we see a recession until 2021 or after; and not a bad recession either.

[dcarrigg]

Re: US Treasuries - If it is not Confusion, nor Panic, then What’s it?

Markets discount.

I feel that 2018 was discounting the slowdown we are seeing now. It may have even been masked by corporate buybacks and cuts in corporate taxes.

The deep correction in the last three months was a kick in the "Fed is behind" that they better stop raising rates and selling bonds. EJ called this loud in clear right after Thanksgiving. The market also probably realized China trade talks wouldn't be resolved.

All central banks are back to risk on. Think of 2018 as 2015 all over. EJ in January 2014 had an article with a chart showing the 10 year Treasury going from 3% down to 1.6%; precisely what happened.

Personally I don't feel we see a recession until 2021 or after; and not a bad recession either.

Anything's possible. But the typical reaction since 1850 to a 3mo 10yr inversion is a recession a bit less than a year out. I've advised friends and family not to panic, but to get out of stocks by sometime this summer when it's convenient. The trend might be bucked. But I'm not taking chances. For total transparency, I've suggested to wait until next week to see if the inversion sticks. So now you know where my money is. Take it for what it is. I thought a recession would hit before now. But I'm actually moving money around over the next couple of quarters.

[MacroSA]

Re: US Treasuries - If it is not Confusion, nor Panic, then What’s it?

Of course, we all agree that the FED can delay another recession for another ten years, but that is not the point of the discussion, at least for me.

The most important thing, in my opinion, is to know what will happen and when it will happen.

If the stock markets were to price in a full recession, that would cause at least a 35% pullback in stock markets major indices. Yes, the FED will, most likely, step in by cutting interest rates and initiating QE4. Consequently, the stock markets will reverse trend again and make new highs. But this will happen after a 35% pullback in stock markets. Something that we try to avoid as investors.

BTW, the inversion has expanded and included the spread between the 10y and the 1M bills.
Negative Spreads includes:
10Y/1M
10Y/3M
10Y/6M
10Y/1Y
7Y/All Short T. Bills
The lowest Yield is the 5Y T Note at 2.240%

Refer to attached snapshots.

[dcarrigg]

Re: US Treasuries - If it is not Confusion, nor Panic, then What’s it?

Of course, we all agree that the FED can delay another recession for another ten years, but that is not the point of the discussion, at least for me.

The most important thing, in my opinion, is to know what will happen and when it will happen.

If the stock markets were to price in a full recession, that would cause at least a 35% pullback in stock markets major indices. Yes, the FED will, most likely, step in by cutting interest rates and initiating QE4. Consequently, the stock markets will reverse trend again and make new highs. But this will happen after a 35% pullback in stock markets. Something that we try to avoid as investors.

BTW, the inversion has expanded and included the spread between the 10y and the 1M bills.
Negative Spreads includes:
10Y/1M
10Y/3M
10Y/6M
10Y/1Y
7Y/All Short T. Bills
The lowest Yield is the 5Y T Note at 2.240%

Refer to attached snapshots.

In fact, fed cutting rates makes the inversion make more sense, like I said, it's a bet on rate lowering in the future. Equities don't necessarily have to suffer, but equities suffering is what tends to lead to rate cuts. Hence why you don't have to believe the structural arguments to still bet on impending recession and pull out of equities.

Anyways, I'd rather be in low return vanilla stuff from fall of 2019 to fall of 2020 than risk a 35% write off. I'll be happy to plunge back in when there's blood in the water. The game is afoot.