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Old 14-08-2019, 07:55 PM   #1
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Yield curve inverts liao

Yield curve of 10 yr and 2 yr us bonds inverts. Ups for experts like shiny things and the rest to give their comments if any.
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Old 14-08-2019, 10:12 PM   #2
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Yield curve of 10 yr and 2 yr us bonds inverts. Ups for experts like shiny things and the rest to give their comments if any.
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Old 14-08-2019, 11:45 PM   #3
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This is what the experts say:

The U.S. Treasury 2-10 year yield curve inverted and that means stocks are on ‘borrowed time,’ says BAML
By Sunny Oh
Published: Aug 14, 2019 6:58 a.m. ET

Yield curve of 10 yr and 2 yr us bonds inverts. Ups for experts like shiny things and the rest to give their comments if any.
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Old 15-08-2019, 12:01 AM   #4
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I'm just gonna copy-paste what I wrote in the Official Shiny Things Thread, and fix a typo...

Hey! So, first: let's talk about inverted yield curves - the US curve is going to be all over the news for the next few days, so let's get ahead of it and understand what it means and how it should affect you (spoiler alert, it shouldn't).

So before Lighthizer and the Mnook dropped their tape bomb this morning, the US treasury yield curve—specifically, the spread between the yield on 2-year and 10-year bonds—was the flattest it'd been in a long time, with 10s yielding just three-and-a-half basis points more than 2s. It traded a little steeper, but it's back at two-and-three-quarter basis points now (and, shameless plug, you can see the current level of the 2s-10s spread at www.istheyieldcurveinverted.net, designed and built by your favourite mouthy ang-moh and powered by Amazon Lambda).

The thing that has everyone freaked out is that that's very close to zero - a "flat" yield curve, where long-dated bonds don't yield any more or less than short-dated bonds. (When long-dated bonds yield more than short-dated bonds, that's called a "normal" yield curve; when short-dated bonds yield more than long-dated bonds, that's called an "inverted" yield curve.) Parts of the US yield curve have already been inverted, un-inverted, and inverted again; but the spread that everyone pays attention to is the 2yr vs the 10yr.

Why is everyone soiling themselves about this? Because, in the past, a flat or inverted yield curve has been a pre-emptive signal of economic slowdowns. (Think about why this is. Bond yields are, very roughly and leaving a lot of things aside, a forecast of where interest rates are going to go in the future. And if the yield curve is inverted, that means interest rates will be cut in the future... and interest rates tend to get cut when an economy is slowing down.)

Over the past forty years or so, an inversion in the 2s-10s US treasury yield curve has tended to precede a recession. Here's a chart from the St Louis Fed's absolute solid gold FRED statistics database: you can play with it yourself at this link here.



And that sort of makes sense. If you think the bond market is pretty good at predicting interest rates, and if you think interest rates are generally correlated with the state of the economy, then it follows that the bond market should be a leading indicator of the economy.

So. Should you freak out about this and sell everything? Obviously the answer is "no, you can sit back and relax". But here are some reasons why it's okay to relax and ignore anyone freaking out about an inverted yield curve.

1) This is the US yield curve, not Singapore. The US yield curve is for the US, it's not going to do a very good job of forecasting economic conditions in a country twelve timezones away.

2) Inversions come as much as two years ahead of recessions. Get a load of this chart right here. I've lined the 2s-10s (scaled) up against the year-on-year change in the Wilshire 5000, a broad US-stock-market index (because FRED doesn't have S&P 500 data back far enough). You can see that when the curve inverts, it can take as long as two years before the year-on-year return on stocks becomes negative!

US 2s-10s first inverted in June '98, eighteen months before US equities peaked; and again in February 2006, again, a year-and-a-half before the peak in US equities.

Hiding out in cash for two to three years is silly. You're missing out on dividends and capital gains in the meantime while you wait for the next recession/downturn/whatever.

3) Even when it comes, a stock market downturn is a buying opportunity. I'm not going to say "recessions don't affect the stock market", that's silly; anyone who lived through the Asia crisis or '08 knows that recessions can and do hurt stocks. But look how far we've come since the lows of March 2009. Anyone who stuck to a strategy of diligently buying—sitting on their stocks and bonds, rebalancing every so often, and reinvesting the dividends and coupons—is in great shape, even if it felt bad at the time. (I still have the ticket for some SPY I bought at seventy bucks or so back in '09.)

If you might need the money within a few years, then you shouldn't be in stocks anyway - money you need within 3-5 years should be invested in bonds. But if you're saving for retirement, then you should be thinking "oh boy, next downturn I'm going to be able to buy stocks for cheap".

So: I give you permission to chill out and not think about the yield curve.
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Last edited by Shiny Things; 15-08-2019 at 12:39 AM..
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Old 15-08-2019, 12:08 AM   #5
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I'm just gonna copy-paste what I wrote in the Official Shiny Things Thread...

Hey! So, first: let's talk about inverted yield curves - the US curve is going to be all over the news for the next few days, so let's get ahead of it and understand what it means and how it should affect you (spoiler alert, it shouldn't).

So before Lighthizer and the Mnook dropped their tape bomb this morning, the US treasury yield curve—specifically, the spread between the yield on 2-year and 10-year bonds—was the flattest it'd been in a long time, with 10s yielding just three-and-a-half basis points more than 2s. It traded a little steeper, but it's back at two-and-three-quarter basis points now (and, shameless plug, you can see the current level of the 2s-10s spread at www.istheyieldcurveinverted.net, designed and built by your favourite mouthy ang-moh and powered by Amazon Lambda).

The thing that has everyone freaked out is that that's very close to zero - a "flat" yield curve, where long-dated bonds don't yield any more or less than short-dated bonds. (When long-dated bonds yield more than short-dated bonds, that's called a "normal" yield curve; when short-dated bonds yield more than long-dated bonds, that's called an "inverted" yield curve.) Parts of the US yield curve have already been inverted, un-inverted, and inverted again; but the spread that everyone pays attention to is the 2yr vs the 10yr.

Why is everyone soiling themselves about this? Because, in the past, a flat or inverted yield curve has been a pre-emptive signal of economic slowdowns. (Think about why this is. Bond yields are, very roughly and leaving a lot of things aside, a forecast of where interest rates are going to go in the future. And if the yield curve is inverted, that means interest rates will be cut in the future... and interest rates tend to get cut when an economy is slowing down.)

Over the past forty years or so, an inversion in the 2s-10s US treasury yield curve has tended to precede a recession. Here's a chart from the St Louis Fed's absolute solid gold FRED statistics database: you can play with it yourself at this link here.



And that sort of makes sense. If you think the bond market is pretty good at predicting interest rates, and if you think interest rates are generally correlated with the state of the economy, then it follows that the bond market should be a leading indicator of the economy.

So. Should you freak out about this and sell everything? Obviously the answer is "no, you can sit back and relax". But here are some reasons why it's okay to relax and ignore anyone freaking out about an inverted yield curve.

1) This is the US yield curve, not Singapore. The US yield curve is for the US, it's not going to do a very good job of forecasting economic conditions in a country twelve timezones away.

2) Inversions come as much as two years ahead of recessions. Get a load of this chart right here. I've lined the 2s-10s (scaled) up against the year-on-year change in the Wilshire 5000, a broad US-stock-market index (because FRED doesn't have S&P 500 data back far enough). You can see that when the curve inverts, it can take as long as twp years before the year-on-year return on stocks becomes negative!

US 2s-10s first inverted in June '98, eighteen months before US equities peaked; and again in February 2006, again, a year-and-a-half before the peak in US equities.

Hiding out in cash for two to three years is silly. You're missing out on dividends and capital gains in the meantime while you wait for the next recession/downturn/whatever.

3) Even when it comes, a stock market downturn is a buying opportunity. I'm not going to say "recessions don't affect the stock market", that's silly; anyone who lived through the Asia crisis or '08 knows that recessions can and do hurt stocks. But look how far we've come since the lows of March 2009. Anyone who stuck to a strategy of diligently buying—sitting on their stocks and bonds, rebalancing every so often, and reinvesting the dividends and coupons—is in great shape, even if it felt bad at the time. (I still have the ticket for some SPY I bought at seventy bucks or so back in '09.)

If you might need the money within a few years, then you shouldn't be in stocks anyway - money you need within 3-5 years should be invested in bonds. But if you're saving for retirement, then you should be thinking "oh boy, next downturn I'm going to be able to buy stocks for cheap".

So: I give you permission to chill out and not think about the yield curve.
Great job. I find people are too obsessed with complex sensations and don't like to follow simple rules
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Old 15-08-2019, 12:21 AM   #6
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I bookmarked
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Old 15-08-2019, 12:37 AM   #7
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Some interesting data here.

https://www.cnbc.com/2019/08/13/afte...fore-doom.html
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Old 15-08-2019, 08:33 AM   #8
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Yield curves in the past (pre-QE) were functioning in an era where central banks were not going crazy printing money and buying assets, including Treasury notes. Now that they are doing so, I would say that yield curves have lost its predictive capabilities, if any to begin with.
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Old 15-08-2019, 09:13 AM   #9
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If history rhymes, we are going to see another record stock market high before the "collapse" everyone was "anticipating".

So yea its probably going to be an buying opportunity
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Old 15-08-2019, 09:16 AM   #10
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Some interesting data here.

https://www.cnbc.com/2019/08/13/afte...fore-doom.html
This is #fooledbyrandomness
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Old 15-08-2019, 09:50 AM   #11
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If history rhymes, we are going to see another record stock market high before the "collapse" everyone was "anticipating".

So yea its probably going to be an buying opportunity
Sounds like the greater fool theory lol.

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Old 15-08-2019, 10:12 AM   #12
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Sensational news are...sensational.
So much opportunities during panic.
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Old 15-08-2019, 10:17 AM   #13
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Old 15-08-2019, 10:20 AM   #14
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It's really disappointing. I was expecting more from the website about helping me to freak out further. Now it's telling me to stop freaking out about it

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Old 15-08-2019, 10:41 AM   #15
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It's really disappointing. I was expecting more from the website about helping me to freak out further. Now it's telling me to stop freaking out about it
Don't be such a freak!
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