Recession

On the Horizon?

Bond Traders Should Prepare for Yield Curve to Zero Out in 2018

“The peak yield on the 10-year Treasury should roughly approximate where the final level of fed funds settles out, so that to us implies a flat yield curve if we assume the Fed will do two or three hikes in 2018,” Mark Vaselkiv, chief investment officer of fixed income at T. Rowe Price, said at a press briefing. In his eyes, the Fed will likely stay the course, and the difference between short- and long-term debt could reach zero as soon as the second half of next year.  

The timing matters because an inverted yield curve has proven a reliable indicator of an impending recession. When the spread between short- and long-term debt shrinks, it tends to hurt bank earnings and the real economy. 

The yield curve from two- to 10-year Treasuries is about 66 basis points, near the flattest since November 2007. 

The last time the spread was at that level and still getting narrower was April 2005, about two-and-a-half years before the recession began. 

It remained close to zero for about 18 months.

 DYI:

As of 11/16/17 the difference between 5 year Treasury Notes and 30 year Treasury Bonds is 73 basis points – [2.77%  - 2.04% = 0.73%].  Very little sauce for the goose for the difference in maturity lengths; if the Fed’s continue to raise rates they will guarantee a recession.  Even without raising rates another recession is on the horizon with all of the imbalances in the economy.

When the next recession hits don’t be surprised to see 10 year Treasury Notes under 1.0% and 30 year Treasury Bonds less than 2.0%!  Pushing the economy squarely into deflation with the Fed’s pursuing QE like madmen by buying up not only Treasury securities but this time around corporate bonds as well.  The Fed’s might go as far and begin purchasing common stocks directly in order to support the market from a total melt down.

Don’t expect the Fed’s balance sheet to be reduced of any significant degree over the next two decades as the Treasury will be revenue hungry due to retiring Boomers tapping Social Security and Medicare.  The interest and possible dividends (if the Fed’s purchase common stocks) is returned to the Treasury.  Simply another way to tax the populous – the Federal Reserve has moved from monetary policy to indirect fiscal policy all without having to go through Congress – Fascism.  Of course there is no such thing as a free lunch.  The Fed’s ginned up this money digitally out of thin air to purchase bonds and possibly stocks;  therefore the money returned to the Treasury will debase (inflate) our currency.  This will not be the only method there will be incremental changes to defer the costs of Social Security and Medicare along with F.I.C.A. tax increases to pay the retiring Boomer’s.

So…

Hold onto your hats and cash better values are ahead!

 DYI