Disaster Bond Yield Curve Inverts for First Time Since 2005 - Markets take a dump in response.

Main yield curve inverts as 2-year yield tops 10-year rate, triggering recession warning

• The yield on the benchmark 10-year Treasury note was at 1.623%, below the 2-year yield at 1.634%.
• The last inversion of this part of the yield curve was in December 2005, two years before a recession brought on by the financial crisis hit.
• A recession occurs, on average, 22 months following such an inversion, according to Credit Suisse.

The yield on the benchmark 10-year Treasury note broke below the 2-year rate early Wednesday, an odd bond market phenomenon that has been a reliable, albeit early, indicator for economic recessions.

The yield on U.S. 30-year bond also turned heads on Wall Street during Wednesday’s session as it fell to an all-time low, dropping past its prior record notched in summer 2016. The two historic moves coming in tandem show that investors are increasingly worried, and indeed preparing for, a slowdown in both the U.S. and global economies.
Early Wednesday, the yield on the benchmark 10-year Treasury note was at 1.623%, below the 2-year yield at 1.634%. In practice, that means that investors are better compensated for loaning the U.S. over two years than they are for loaning for 10 years. The yields steepened later in the session, pushing the 10-year rate back above that of the 2-year note.

The yield on the 30-year Treasury bond traded at 2.02%, well below its former record low of 2.0889% hit in 2016 following Britain’s Brexit vote. Yields fall as bond prices rise.

The last inversion of this part of the yield curve was in December 2005, two years before the financial crisis and subsequent recession. Economists often give the spread between the 10-year and the 2-year special attention because inversions of that part of the curve have preceded every recession over the past 50 years.

“I have to yield to the historical evidence and note that the phrase ‘this time is difference’ usually doesn’t work,” said Arthur Bass, managing director of fixed income financing, futures, and rates at Wedbush Securities.

“It’s a very unusual time period: We haven’t had tariff issues like we’re dealing with currently in about 80 years,” he continued. “It’s about dealing with negative rates in most of the European countries and Japan. Again, I have respect for the inverted yield curve as a signal that recession is ahead.”

Still, while the inversion is cause for concern, there is often a significant lag before a recession hits and an economic downturn ensues.

Data from Credit Suisse going back to 1978 shows:

• The last five 2-10 inversions have eventually led to recessions.
• A recession occurs, on average, 22 months following a 2-10 inversion.
• The S&P 500 is up, on average, 12% one year after a 2-10 inversion.
• It’s not until about 18 months after an inversion when the stock market usually turns and posts negative returns.

Going farther back in history, the yield curve’s track record gets a little more spotty. Post WWII, inversions have predicted seven of the last nine recessions, according to Sung Won Sohn, professor of economics at Loyola Marymount University and president of SS Economics.

“This is a track record any economist would be proud of,” said Sohn.

Long-term yields have plummeted in August as concerns surrounding trade developments and GDP growth — coupled with expectations for lackluster inflation and more aggressive central bank action — have sent nervous traders in search of safer investments.

Central banks around the world, including the Federal Reserve, have pivoted once again to easing policies. Major government debt in countries like Germany now have negative yields.

The yield on the 10-year Treasury note, an important rate banks use when setting mortgage rates and other lending, has fallen a steep 40 basis points this month.

“The US equity market is on borrowed time after the yield curve inverts. However, after an initial post-inversion dip, the S&P 500 can rally meaningfully prior to a bigger US recession related drawdown,” wrote Bank of America technical strategist Stephen Suttmeier.

A portion of the yield curve inverted earlier this year, raising economic concerns as three-month yield topped the 10-year yield.

The popularity of the safety offered by bonds is at financial crisis levels among professional investors as many steel themselves for slowing growth ahead, according to a survey of fund managers conducted by Bank of America Merrill Lynch.

The poll found a net 43% of market pros see lower short-term rates over the next 12 months, compared with just a net 9% that saw higher long-term rates. In sum, that’s the most bullish outlook on fixed income since November 2008.

“While yield curve inversions can be a leading indicator of economic weakness or recession, they are an early warning sign,” Suttmeier said.

 

[pwnest injun]

This has far less to do with the USA than with Europe. Old Lady Europa going tits up, my droogs.

 

[Freedom Fries]

I look at it as evidence for another reason these idiots are so bitter. They have never had thick enough skin to weather the markets. Anyone who invests in the markets and has any kind of success doesn't panic at the slightest downturn. They happen all the time. It works well for those of us who actually make money out of the market, however.

Market drops minorly: Thin-skinned panic-prone people sell.
Ok: People like me buy.
Market recovers days or weeks later: people like me sell and buy the next stock people mindlessly panic about.

It's the history of making money in markets... the primary way to do it, IMO, and it's kind of embarrassing that fools part with their money so readily and then blame the market.

They should have never put a cent into it in the first place if they don't have the backbone or fortitude for it.

Edit: I mean stock markets and not commodity markets.

I think most normal people just buy mutual funds and ETFs and do some irrational investing in companies they believe in or know a little something about the field and just hold. If they aren't then they're dumb because as an individual and uneducated investor, that's how you do well.

Quoting myself here because there was a similar thread and everyone absolutely must hear my amazing, totally unique take that almost everyone else already has

Someone correct me if I'm wrong here.
Bad results in the German and Chinese economy caused economic loosening there and a bank run on US T-bonds which caused an inversion and in turn caused this panic selloff. Now, the 2yr/10yr inversion isn't exactly a good thing, but I'm wary of a sky is falling mentality. The inversion was pretty short lived as well.

Also the real crash doesn't usually come until around a year after, so I guess we will see what happens. I'm not gonna liquidate everything and freak out. Might buy a couple put options for my pitiful non-retirement account next spring if the hysteria dies down and they aren't too pricey or even bracket the money I invest with a put/call offset just to play around with it for fun.

Edit: Also job numbers and the tiny wage growth we finally have been seeing have me kinda optimistic overall

I would like to add that I wouldn't bother buying put options if the (near) yield inversion gets better or other market factors looked really good because I don't have so much money invested in nonretirement accounts that it would be worth protecting that way. Also keep in mind that bracketing yourself takes away your exposure to a limited downside while removing the possibility of an unlimited upside. It isn't really a good tool unless your situation calls for it IMO

 

[RodgerDodger]

I look at it as evidence for another reason these idiots are so bitter. They have never had thick enough skin to weather the markets. Anyone who invests in the markets and has any kind of success doesn't panic at the slightest downturn. They happen all the time. It works well for those of us who actually make money out of the market, however.

Market drops minorly: Thin-skinned panic-prone people sell.
Ok: People like me buy.
Market recovers days or weeks later: people like me sell and buy the next stock people mindlessly panic about.

It's the history of making money in markets... the primary way to do it, IMO, and it's kind of embarrassing that fools part with their money so readily and then blame the market.

They should have never put a cent into it in the first place if they don't have the backbone or fortitude for it.

Edit: I mean stock markets and not commodity markets.

Someone never taught these idiots that a down market is when you buy. And also to give some thought before buying, instead of following the lemmings. People who invest in a decade old company, that has never shown a profit and is billions in debt deserve what they get.

 

[Sped Xing]

The market has spoken. No black lady Bond.

 

[Cosmug]

I’m not seeing any basis for panic here. Correct me if I’m wrong, I don’t really invest much, but the treasury bond market is people giving the government a loan buy buying a ticket that will be worth their initial cost, plus some interest, in 5, 10, or 15 years. This market is adjusting it’s yields downwards by fractions of a percent for new notes printed this year, redeemable years from now. And people are panicking because that has happened before at some point in the TWO YEARS prior to a recession? What qualifies as a recession here?
I literally don’t play this investment shit but the plain English here makes it sound like a dog bites man story about government loans being worth %115 instead of the %120 that was projected years ago.

 

[Freedom Fries]

I’m not seeing any basis for panic here. Correct me if I’m wrong, I don’t really invest much, but the treasury bond market is people giving the government a loan buy buying a ticket that will be worth their initial cost, plus some interest, in 5, 10, or 15 years. This market is adjusting it’s yields downwards by fractions of a percent for new notes printed this year, redeemable years from now. And people are panicking because that has happened before at some point in the TWO YEARS prior to a recession? What qualifies as a recession here?
I literally don’t play this investment shit but the plain English here makes it sound like a dog bites man story about government loans being worth %115 instead of the %120 that was projected years ago.

So I want to explain what is happening here. Bear with me because I just got home from a happy hour. Please correct me if I'm wrong here. I'm not gonna get into YTM or more technically accurate but complex things here because that's pointless.

Spoiler: Coupon Rate

Coupon Rate is the annual payment from the bond / bond par value

I'm not going to go into how that's calculated because frankly, that's fucking murky.

Spoiler: Par Value vs. Bond Market Value

Par Value is the face value of the bond. Speaking in terms of US Treasury Bonds ("T-Bonds") it would be the original buyer's payment for the bond and the amount of money the bond will give once it expires.

The market value of a bond changes as the debt market does. Let's say you bought a 1000 par value bond with a 10% coupon rate, but some time later 1000 par value bonds at the same level of risk have a 12% coupon rate. Obviously you aren't going to be able to sell your bond at the same price you bought it for AKA "Par Value" AKA "Face Value" bonds for the same amount you bought them for. When similar instruments are offering a better coupon rate, your bond now sells for less than it's Par Value on the market and vice versa. This new amount is the Bond Market Value.

Spoiler: Current Yield

It is my understanding that by yield here they are essentially talking the current yield of various T-Bonds.

Current Yield = Annual Coupon Payment / Bond Market Price

Spoiler: The Time Value of Money, Opportunity Cost, and Risk Averseness

Money loses or gains value over time based on inflation and deflation, interest rates, and equity (the stock market basically) this concept is called The Time Value of Money

While you have money tied up, you can't do other things with it. Usually people demand higher rates of return on money that will be tied up for longer. Money tied up for longer also is at a higher risk for the person you gave it to defaulting or crashing. This all ties into Opportunity Cost.

People tend not to like risk and are willing to pay a premium for safety even when statistics bear out better results with more risk. This is the psychological condition of humans when investing money. Humanity is overall financially Risk Averse.

Spoiler: Normal Bond Market

Because of The Time Value of Money, Opportunity Cost, and Risk Averseness, people usually demand a higher coupon rate for longer bonds term bonds than shorter term bonds.

If a friend asked you for 1000 and said he would pay you back in 3 months, you might charge him very little interest or none at all. If he said he would pay you back in a couple years, you might ask him to throw an extra 100s in there when he gave it back.

Here we are specifically talking about the 2year T-Bond and 10year T-Bond. In a healthy bond market, for the reasons listed above, the yield for a 10year T-Bond is higher than the yield for a 2year T-Bond

Spoiler: Inversion

Inversion happens when a shorter term bond at a similar risk level has a higher yield than a longer term one.

The 2yr vs 10yr bond yield among others is tracked and has been a hallmark indicator of recessions in the US ever since the great depression. It is typically represented as = 10yr yield - 2yr yield. When this number is negative, then the bond market is inverted.

Bonds can invert for a number of reasons, but mainly it happens because the majority investors think interest rates on similarly risky bonds will drop and want to lock in to a longer term bond's coupon rate. This drives the market price of the bond up, reducing the yield.
This can happen for a few reasons, a few that come to mind are:
- Countries loosening and decreasing interest rates to spur economic growth
- Fear of a credit crunch
- Investors seeking safer investment vehicles as equity becomes "too dangerous"

Spoiler: Why This May Be a False Warning or Representative of a Global Crash Coming from Other Countries

US market indicators are largely good aside from mixed inversions. Jobs have been adding at very high rates beating guidance, and wages are finally increasing if slightly.

This inversion may have been caused by international investors disillusioned with market performance in their countries.
China and Germany, two of the world's largest economies, under-performed. Anticipating increased risk and decreased coupon rates in those countries, investors based there flocked to the safety of the fairly long term 10year T-Bonds driving demand and therefore price up, reducing yield to lower than the 2year T-Bonds.

This inversion may have been caused by China and other countries in the current trade war (UNLIKELY).
China and other frenimies hold a great deal of US debt (T-Bonds). One of the ways they could fight back against US sanctions and tariffs is to buy or sell T-Bonds to destabilize our economy. This would ultimately be cutting their nose off to spite us because we can tighten and/or loosen our economic policy one step behind them and they would take a shellacking while doing it.

Please HMU if you don't understand or want to know more. I probably didn't do a great job of explaining and am not an economics but a finance guy.

 

[Cedric_Eff]

So is this the MKUltra media overreacting? Or is it an actual concern?

 

[Freedom Fries]

So is this the MKUltra media overreacting? Or is it an actual concern?

As far as I'm concerned, media has an expressed interest in causing investors to panic and crashing the economy. The sky shouldn't be falling for at least a year if it all though. As always I will look to invest in companies I think have economic moats. Pairing a junk bond with a CDF is always a fun way to match a T-Bond rate in a market you think is going to crash if you have the time to.

 

[Helium]

Well this explains why Epstein suicided himself. Here I was thinking it was because he was going to be raped in prison by Tyrone for 45 years, but it turns out it's the oncoming recession. Epstein was smart then, he got out before the crash.