Yield curve on US Treasuries close to inverting

Discussion in 'Economics' started by just21, Aug 29, 2005.

  1. just21


    By Jennifer Hughes in New York, Financial Times
    Published: August 28 2005 22:00 | Last updated: August 28 2005 22:00

    US bondsThe US Treasury yield curve is poised to invert for the first time in more than four years, forcing long-term borrowing costs below short-term rates.

    Inverted yield curves are unusual and in the past have often signalled a recession. For borrowers, the chance to take out cheap long-term loans is attractive. But for lenders, an inverted curve means they lose money on long-term loans. That can discourage them from lending.

    Yields on two-year Treasury notes currently stand at 4.06 per cent while 10-year notes yield 4.18 per cent, a spread of just 0.12 percentage points. A year ago, the difference was 1.8 percentage points.

    But in spite of the flattening curve, many bond traders doubt a recession is on the horizon.

    Jason Evans, co-head of Treasury trading at Deutsche Bank in New York, said: “The market is very much at ease with the idea that the link between the yield curve and the economy has in fact broken down.”

    John Roberts, managing director of rates at Barclays Capital in New York, said: “This is just a cycle, a great big trade that swings back and forth over time.”

    Because bond prices move inversely to yields, many investors have been shorting shorter-dated notes on which prices have fallen and yields risen and buying longer-dated paper, where yields have fallen.

    A bet of $100m (€81m) not large in Treasury market terms shorting two-year notes and buying 10-year paper would have netted $9.6m in the past year, a rate of return outstripping US equities.

    Traders have largely attributed the flattening of the yield curve to growing demand for longer-dated paper, of which there is a shrinking supply. In particular, they point out that changes in pension regulations have forced some asset managers to buy longer-dated bonds so that their assets better match their liabilities.

    While the US is not alone the yield curve on UK gilts has been inverted for some time, with no recession as yet traders are wondering how much further the current trend can go. “If you caught this from the beginning, you've done well, but you should be starting to think where your exit point is,” said Mr Roberts.

    Investors might already be eyeing other markets. Eric Wand, strategist at 4Cast Consultancy, said the eurozone might be next. “The curve there is hugely steep, relatively speaking. People have seen this work really well in the UK and the US and we're just starting to see some of this in the eurozone,” he said.
  2. It just got in on a Eurodollar spread trade long dec 06 and short march march 07 for a credit of a 0.010 hoping to sell at 0.00.
  3. Must be a slow day in financial journalism land. Some of it is quite amusing when what they print turns out to be wrong - ie. If you read CBSMarketwatch, there was an columnist earlier in the year using technical analysis to justify higher bond yields, LOL.
  4. Financial Times today (Sept 1) mentions in two articles that US 2-yr and 3-yr inverted:

    "Action at the short end of the US yield curve also sent three-year yields below two-year yields - the first sign of an inversion in the curve."
  5. I can't believe yield curve inversion is really making news, what the heck was everyone looking for when the Fed began rasing short term rates? Ya'll didn't expect long rates to rise did ya?

    Here's something more interesting:


    Will the price of gas price rise above the numerical value of the 30 year fixed mortgage?
  6. Interesting... It will be funny if 5/15 year rates will intervert against 30 year mortgage rates.
  7. TooL


    LOL, you post some very funny cartoons.
  8. Im pretty bullish right now and I cant see anything wrong with the economy...

    Could it be possible then that those bloddy yelds are reading into some future disaster that is gonna throw us in to recession?

    Any thoughts?
  9. We have a winner!!!

    Thousands Complain to Feds on Gas Gouging

    " There have been isolated cases of unusually huge price jumps, including a gas station in Georgia that briefly charged $6 a gallon when competitors ran out of gas. "

    6.00 (gasoline in GA) > 5.XX (average fixed 30 year mortgage)
  10. $6.00 a gallon is still less than 16 oz Beer at Soldier Field.
    #10     Sep 2, 2005