...or is he just saying it?
Neither answer is very good. I started expressing concern about a yield curve inversion months ago. The fact is that this time could be different and that would be fine.
What is troubling is the easy dismissal of the historical significance of an inverted curve. If the Fed does not factor this in to its analysis (not really what I expect) we may have some trouble.
Oof.
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5 comments:
It would seem the intermediate part of the treasury curve is driven by foreign purchasers (10 years) and now the long end (30 years) will be dominated by asset/liability matchers (ie. those institutions needing to fund long-term liabilities). So if yields 10 years and out are artificially low is this an inversion in the true sense of the word? I'm not sure. I think whether it's different this time has much to do with the answer to this question.
I'm afarid I have to disagree with your conclusion.
An inverted curve restricts access to capital via loans. The cause is irrelevant. The bottom line is with an inverted curve ledning money is not profitable.
Only two ways out of this curve.
1) The long end rises ( bonds fall ).
or
2) The short rates get lowered ( by HB)
It would seem that if the big smart boys really think a dose of inflation is right around the corner, the long end rates would rise, because who wants to be stuck with a long bond with rising inflation? If inflation goes to 10%, what good is a 4.75% Tsy going to do ya?
I tend to try to remember that there ARE large investors that DO have a handle on the big things like inflation, ect....so they are not selling their bonds---tells me something.
I think the fed is in a pickle. If they raise rates to stop inflation, they will sqeeze the banks profit, and ravage consumers. The consumer will stay home and mow the grass on Saturday instead of going to the mall and all that. All the ARM loans on homes and IO loans will ratchet up....you get the pic. SO...they CAN not raise but so far with out devastation.
But, if inflation is really comming back, and THEY ( HB ) know it..what are they to do? I think they not raise so much but continue take money out of the system, buy selling bonds. Take some of the money floating around out.
We'll see...
g
This is a real dilemma, no question.
I think Roger nailed it. I've been thinking about this myself. Is the inverted yield curve an "indicator" of a future recession. Or is it a CAUSE!!! I think this is also why an extended period is needed for the inverted curve for a slowdown/recession to occur in the future. Banks and other lenders don't change their practices day to day. But give an extended period they do.
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