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Does Jerome Powell Hear the Alarm Bells from Flattening Yield Curve?

Discussion in 'Topical Discussions (In Depth)' started by Scorpio, Nov 14, 2017.



  1. Scorpio

    Scorpio Скорпион Founding Member Board Elder Site Mgr Site Supporter ++

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    Does Jerome Powell Hear the Alarm Bells from Flattening Yield Curve?

    [​IMG]
    Source: Federal Reserve Bank of St. Louis

    By Pam Martens and Russ Martens: November 9, 2017

    In November of 2016, there was more than 100 basis points (one percent) difference between the yield on the 2-year and the 10-year U.S. Treasury Note. As of this morning, that difference stood at 68 basis points, a dramatic flattening in the yield curve and harkening to the levels seen during the onset of the financial crisis in 2007.

    As of 7:48 a.m. this morning, the spread between the 10-year Treasury Note (yielding 2.33 percent) and 30-year Treasury Bond (yielding 2.81 percent) is even smaller, at a meager 48 basis points or less than half of one percent.

    It is a serious commentary on the bizarre financial times in which we live that a fixed income investor would be rewarded with less than half a percent of additional income to add 20 years of risk to the maturity date on his bond.

    The Treasury yield curve is the sine qua non to bond investors because it is thought to represent the composite wisdom on the future of the U.S. economy from a vast body of diverse Treasury buyers – from pension funds to insurance companies to mutual funds to mom and pop investors.

    A growing economy with related worries about increases in future inflation would typically produce rising yields on longer-term notes and bonds, not declining yields. A dramatic flattening in the yield curve is seen as a red flag for an economic slowdown, sagging inflation and as a potential precursor to the onset of recession. None of that would be consistent with the Federal Reserve continuing to tighten interest rates – which it is expected to do again in December.

    The dramatic flattening in the yield curve comes at an inopportune time for the Federal Reserve, which is in the midst of passing the baton from a known factor, Chair Janet Yellen, to a less known factor, newly nominated Fed Chair, Jerome Powell. Unlike his recent predecessors, Powell holds no degree in economics. He has a law degree from Georgetown University Law Center and a B.A. in Politics from Princeton University. Powell has served as a member of the Fed Board of Governors since 2012. From 1997 through 2005, Powell was a partner at the private equity firm, the Carlyle Group. He also has significant Wall Street investment bank experience, having previously worked in executive positions at Dillon Reed and Bankers Trust.

    Powell’s Senate confirmation hearing is set for November 28 and it is anticipated that he will take the reins at the Fed in February when Yellen’s term expires.

    Traders of shares in the largest Wall Street banks have taken note of the flattening yield curve with cumulative share losses in the range of two to four percent over the past four trading sessions. JPMorgan Chase, which closed at $101.59 on Thursday, November 2, ended the trading day yesterday at $97.64.

    Bank stocks, the Treasury market and its yield curve may also be re-pricing the prospect of a lame duck presidency less than 10 months into the first term of Donald Trump. See Four Big Banks Lose $37.60 Billion in Market Cap in Trump Fallout as a guide to what happened on the day it was announced that Deputy Attorney General Rod Rosenstein signed an order naming former FBI Director, Robert Mueller, to become the Special Counsel for an inquiry into the Trump campaign’s involvement with Russia. The first indictments in that matter were unsealed in Federal Court on Monday, October 30.

    http://wallstreetonparade.com/2017/...-the-alarm-bells-from-flattening-yield-curve/
     
  2. solarion

    solarion Gold Member Gold Chaser Site Supporter

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    Looks like that spread has opened up to a whopping 56 bps as of today...which is pathetic. While I'm not a huge fan of his speaking style Greg Mannarino has been trying to draw attention to this issue for some while.
     
  3. andial

    andial Sir Midas Member Site Supporter ++

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    There is huge demand for long term government bonds don't think the flattening that you see these days means we are heading for a slowdown or some financial stress like it used to mean before 2008.
     
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  4. solarion

    solarion Gold Member Gold Chaser Site Supporter

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    Ah so...it's different this time? lol I hope you're right, but I sure ain't banking on it. No offense.

    BTW, why do you suppose "people"(probably fund managers tossing around other people's funds) are clamoring to lock up funds for 30yrs when the yield is pathetic?
     
  5. Scorpio

    Scorpio Скорпион Founding Member Board Elder Site Mgr Site Supporter ++

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    I think andial is only referring to the lack of 'real markets' and sanity is/are lacking

    we have to always remain cognizant of the fact that every day, every week, every month, the sheep are dumping big dough into 401K funds of one type or another. And with that, the advisers all preach diversification, x amount stocks and y amount bonds. This alone adds a great deal of buying pressure to both.
     
  6. Joe King

    Joe King Gold Member Gold Chaser

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    Unless its all part of the plan. In which case it'd be entirely consistent.

    Because they're fearful of losing more than that pathetic gain anywhere else? That's the only reason I'd do something like that it. Ie: If I saw calamity coming and needed to park some funds somewhere for awhile that I didn't want to lose.
    ....but the way it'll work in this case is that they'll get paid back with grossly devalued funds.

    True, but is the rate at which that "big dough" is being dumped increasing enough over time to keep everyone happy?
     
  7. andial

    andial Sir Midas Member Site Supporter ++

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    They (money managers) can dump those bonds in a split second if they wanted to nothing is locked up all that money is just parked there.
     
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