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Federal reserve and the yield curve

From Birch Gold Group

A few weeks ago we reported the Fed was getting hawkish despite what they were calling “low inflation.”

In that article, we showed rates possibly being raised more than 4 times in 2019. But more importantly, we warned that anyone investing in the market should start preparing to expect the unexpected.

And right now, it looks like the Fed’s bizarre moves are continuing.

This time it involves the yield curve. The yield curve represents the difference in interest rate paid on short-term Treasury notes and long-term Treasury notes in the bond market.

A common signal of economic health from the bond market involves looking at the difference between the 2-year and 10-year rates (also called the “spread”).

Over the last three decades, when 2-year yields are lower than the 10-year bond yields, it signaled a healthy economic outlook.

But when that “spread” shrinks, the yield curve is said to be flattening. If it “reverses” entirely, the yield curve is inverted (or negative).

Since 1980, an inverted yield curve preceded an economic recession with reliable accuracy (see graph below, red arrows point to 3 recent events):

us treasury yield

So the yield curve is a fairly reliable signal for imminent recession. And notice the downward trend of the yield curve on the right side of the graph. That indicates a flattening yield curve heading towards inversion.

And when we zoom in, the picture looks even more dire.

As of July 11th, 2018 the Treasury reported the difference between the 2-year and 10-year bonds to be 27 basis points (or .27% – see chart below).

This is the lowest spread since the 2008 Great Recession, and already much lower than the historical graph above.

us treasy yield

There is no doubt the yield curve is flattening, and at an alarming pace.

Taking the historical data into account, if this trend continues and it does invert, that would be a signal of an imminent recession.

And one more Fed rate hike could invert it, according to Investing.com.

But strangely, it looks like the Fed wants to sweep the yield curve signal under the rug.

Fed: “When the Yield Curve Creates Doubt, Throw it Out”

So as the curve flattens, and gets ready to signal a recession, at a recent FOMC presentation the Fed examined the prospect of replacing it.

Wolf Richter commented on this presentation, and explained what the “new” indicator examined:

This new indicator – rather than looking at the spread between longer-term yields of two years and 10 years – is looking at the spread between short-term yields. It’s “based on the spread between the current level of the federal funds rate and the expected federal funds rate several quarters ahead derived from futures market prices.”

There was no indication in this meeting that the FOMC members had any doubts about the reliability of the original yield curve signal.

But unusually, the “staff” did hint that the change-of-indicator may be made because they don’t like what the flattening yield curve points to.

From the June 12-13 FOMC meeting minutes:

The staff noted that this measure may be less affected by many of the factors that have contributed to the flattening of the yield curve, such as depressed term premiums at longer horizons.

So the Fed doesn’t favor an indicator that points out the distortions it is creating. Then it replaces that indicator with another one that doesn’t do that?

Seems awful fishy, like one of those shell games where you try to guess which shell the ball is under (but the ball isn’t there).

Don’t Let the Fed’s “Shell Game” Damage Your Retirement

Gold is historically consistent during uncertain market conditions like these. In fact, central banks have remained buyers and demand all over the world is heating up.

So hedge your bets against the Fed “shell game” while there’s still time.

  • George

    Wonderful, Wonderful, Wonderful, Now the metals price is manipulated, and Yield Curve, Inversion, or Tendencies to Invert, is the news of the day. Why did the metals not reach reality value, or one can say parity value, during all the other Yield Curve Inversions, or Tendencies to Invert times???????

    Your all whistling DIXIE and hoping to win the finance PM War???? asyou monitor yield curve signs.

    “Go Get’em Boys” yelled Picket at Pickets Charge, that fateful day at Gettysburg, Pa. You know what happened, reality happened and in like 3 days 30 thousand lives of good hard working citizens on both sides were lost.
    So if you need to know the reality, only a Parity Adjustment of Real Values will correct the entire situation. That is to say, a U S A Currency with a three stool valuation, Gold ( or PM’s) value to Oil ( or energy ), and value to Grain ( or AG products ). That will make the world stand up and look at the U S A again. Not some Yield Curve FU&*%$# Horsesh*&, that has the citizens listening and shaking there heads yeah, oh, yeah!!!!
    Put what is real back on top of the LIST, and Yield Curve Ain’t it boys, it is not real valuation for projecting anything. Example, did gold or PM’s reach parity during all the other Yield Curve BS? No it did not.
    Talk to me about a $35K, or $45K per ounce that is reality at parity, compared to all the U S A Debt Notes ( US $$) running around the world.