Yield Curve Totally Inverts -- Recession Looming?

[Bman]

BOND REPORT
Yield curve inverts after strong auction

By Leslie Wines, MarketWatch
Last Update: 10:48 AM ET Feb 10, 2006


NEW YORK (MarketWatch) -- The Treasury yield curve turned completely upside down early Friday, pushing the 2-year yield above the yields of both the 10-year and 30-year instruments, intensifying a debate over whether the inversion signals a looming recession.

The inverted yield curve effectively undermines the incentive for making long-term loans.

Long-term yields are being pushed lower by intense demand that has led to higher prices for longer-maturity bonds, following Thursday's highly successful auction of 30-year bonds, the first sale of these maturities since 2001.
Prices and yields move in opposite directions in the fixed-income market.

The benchmark 10-year yield last was up 10/32 at 99 30/32 with a yield
of 4.507%, placing it above the 4.472% yield of the 30-year bond but below the 2-year note's 4.631% yield.

Completing the picture, the yield on the 6-month Treasury bill was higher than the 2-year yield, standing at 4.681%.

Economists who do not believe the inverted curve is a harbinger of a slowdown include Alan Greenspan, the former Federal Reserve chief who suggested the inversion is primarily an outgrowth of intense global demand for U.S. assets.

Thursday's 30-year bond auction attracted a very high 65.4% indirect bid, a category that includes foreign central banks, indicating that foreign demand remains boisterous.

Tom Girard, senior portfolio manager at Weiss Peck & Greer, said he doesn't believe the inversion signals a recession, defined as two or more consecutive quarters of declining gross domestic product.

However, some slowing due to the upside-down state of yields is inevitable, in his view.

"It will become more and more difficult for financial institutions to make money," Girard said. "So it will be harder for banks to be aggressive in making loans."

Earlier Friday, the Commerce Department reported that the nation's trade deficit widened in December by 1.5%, to $65.7 billion, and swelled to a new annual record. Read full report

Analysts surveyed by MarketWatch had expected the deficit to increase to $64.6 billion. See Economic Calendar.
The trade gap with China reached a record $201.63 billion in 2005, up from $161.94 billion in the same period last year.

Girard said the data were bullish for the fixed-income market because it implies the possibility of a downward revision to fourth- quarter GDP, which initially was reported at a low growth rate of 1.1%, far below the 4.1% gain seen in the third quarter.

http://www.marketwatch.com/News/Story/Story.aspx?guid=%7B15F9959D%2DAB4E%2D409D%2DBCCC%2 DF58A87BF46C2%7D&siteid=google&print=true&dist=printTop

[Spectre]

Unfortunately I have no idea what this means.

[Catwoman]

Unfortunately I have no idea what this means.
In the past it meant anticipation of inflation, usually from commodity sources and wage inflation coupled with lack of gains in productivity. (Think COLA's-Cost of living adjustments to union workers and retirees)

In this case, I see no wage inflation due to producivity gains, massive immigration and outsourcing. Yes on the other hand, we have had a run up of commodity prices.

[Bman]

In the past it meant anticipation of inflation, usually from commodity sources and wage inflation coupled with lack of gains in productivity. (Think COLA's-Cost of living adjustments to union workers and retirees)

In this case, I see no wage inflation due to producivity gains, massive immigration and outsourcing. Yes on the other hand, we have had a run up of commodity prices.



In other words, "This time its different"

(the most dangerous words on Wall Street!

[Bman]

In this case, I see no wage inflation due to producivity gains, massive immigration and outsourcing. Yes on the other hand, we have had a run up of commodity prices.


As you know, Wall Street is constantly looking ahead 6 months to a year (or longer)

Productivity recently plunged and wage increases rose at the fast pace in ages.

When you combine that with the MASSIVE (and I MEAN MASSIVE) inflation in commodities over the past 2-3 years, you get a pretty strong case for soaring inflation on the horizon

I think Steve Forbes recently came out with that prediction as well.

[Bman]

Follow up to my last post



Productivity falls, jobless claims improve By Andrea Hopkins
Thu Feb 2, 12:55 PM ET



WASHINGTON (Reuters) - U.S. business productivity fell unexpectedly in the fourth quarter and labor costs accelerated sharply in what could be an early sign of wage inflation, a government report showed on Thursday.

The Labor Department said nonfarm business productivity fell at a 0.6 percent annual rate in the fourth quarter, marking the first decline since the first quarter of 2001. That pushed unit labor costs up at a 3.5 percent pace -- the fastest growth in a year and well above market expectations.

"With energy costs sky-high and compensation increasing, it is going to be very tough to keep inflation from accelerating this year," said Joel Naroff, chief economist at Naroff Economic Advisors. "So if you were wondering why the Fed keeps raising rates, wonder no more."

Wall Street had expected a fourth-quarter slowdown in productivity growth to a 1.6 percent rate, and the outright decline raised fears of more interest-rate increases, sending stock markets lower. The Dow Jones industrial average (^DJI - news) and the Standard & Poor's 500 Index (^SPX - news) were down about 0.75 percent, while the Nasdaq Composite Index (^IXIC - news) was down about 1 percent in the early afternoon.

Treasuries debt prices fell initially but later stabilized to be nearly unchanged, while the dollar fell against the euro and pared gains against the yen after U.S. intelligence chief John Negroponte said al Qaeda is still preparing for attacks on the United States.

Strong productivity growth in recent years had allowed employers to keep costs low even as output increased. An end to that growth suggests businesses have squeezed as much efficiency out of their workforce as possible, and are having to hire new employees and boost spending to keep up.

But some analysts said the surprise drop in productivity was partly because of distortions from the hurricanes that smashed into the U.S. Gulf coast in late summer, cutting production.

"This could be a temporary blip," said Patrick Fearon, senior economist at A.G. Edwards & Sons in St. Louis.

Third-quarter productivity growth was also revised lower, to a 4.5 percent clip from the previously reported 4.7 percent increase.

For 2005, growth in business productivity rose at a 2.7 percent annual rate, down from 3.4 percent growth in 2004 and the slowest increase since 2001.

Unit labor costs were up 2.4 percent in 2005, more than double 2004's 1.1 percent gain and the largest annual increase since a 4.2 percent gain in 2000.

TIGHTER LABOR MARKET

Economists had expected only a 2.3 percent increase in fourth-quarter unit labor costs -- a key gauge of profit and price pressures -- and the sharp acceleration in employer costs suggests inflation pressures may be hitting the labor market.

"Unit labor costs were up 3.5 percent which, if sustained, would suggest increased labor cost pressures down the road," said Cary Leahey, senior managing director at Decision Economics in New York.

"But ... the trend in unit labor costs is still declining and I would argue that the market and the Fed will say that this is a one-time surge," Leahey said.

The Federal Reserve has raised interest rates 14 times since June 2004 in a bid to stave off inflation pressures, and market-watchers expect one more increase in the months ahead.

A second report from the Labor Department suggested the job market has tightened further since the fourth-quarter.

New claims for U.S. unemployment benefits fell unexpectedly to 273,000 last week from 284,000 the prior week, pushing a four-week average of claims to the lowest level in nearly six years. Wall Street had expected claims to rise to 295,000.

A more comprehensive look at the U.S. job market will come on Friday with the release of the Labor Department's monthly payrolls report. Employers are expected to have added 240,000 jobs in January after a disappointing 108,000 increase in December. The unemployment rate is forecast to remain at 4.9 percent.

"Claims have been drifting well below normal levels throughout the month. On the eve of the January payrolls report tomorrow, it could just indicate that a blowout (strong) number for payrolls could be in the cards," said Ronald Simpson, managing director of global currency analysis at Action Economics in Dobbs Ferry, New York.

A separate report showed U.S. companies planned 103,466 layoffs in January, down 4 percent from December but 12 percent higher than the January 2005 level.

Announced layoffs were above 100,000 for a second straight month, according to outplacement firm Challenger, Gray and Christmas, Inc. It said the layoffs largely reflected huge cuts at struggling automaker Ford Motor Co. (NYSE:F - news) as well as continued fallout from Hurricane Katrina and a typical post-holiday purge of seasonal workers in the retail sector.

"It is not unusual to see heavy job-cutting in the beginning of the year. Companies are still making adjustments based on the previous year's performance," said John Challenger.

(Additional reporting by Ros Krasny in Chicago)


http://news.yahoo.com/s/nm/20060202/bs_nm/economy_productivity_dc

[Bman]

Bernanke: Fed must watch its step

Fed chief says flat yield curve not a sign of economic slowdown, says it isn't clear why long-term bond yields are so low.

March 20, 2006: 9:41 PM EST


NEW YORK, March 20 (Reuters) - Federal Reserve Chairman Ben Bernanke said on Monday it was hard to gauge why long-term interest rates were so low and said the U.S. central bank could not rely on them as its sole guide for policy-making.

"The implications for monetary policy of the recent behavior of long-term yields are not at all clear-cut," Bernanke told the Economic Club of New York.


In his first public foray onto Wall Street since taking over as Fed chairman on Feb. 1, Bernanke ran through several competing explanations for the unusually low level of U.S. bond yields despite a steady ratcheting up of short-term interest rates by the U.S. central bank.

Bernanke revisited a thesis he first laid out a year ago that a "global saving glut" - an excess of savings because of a dearth of enticing investments - could be depressing rates.

If this were the case, he said, then as long as the factors behind it persisted "global equilibrium interest rates - and, consequently, the neutral policy rate - would be lower than they otherwise would be" to keep the economy on an even keel.

But Bernanke laid out a number of other possibilities and concluded: "The bottom line for policy appears ambiguous."

Fed policy-makers have raised benchmark overnight rates to 4.5 percent in a string of 14 steps dating to June 2004 and are widely expected to bump them up another quarter-percentage point at a meeting next Monday and Tuesday.

While overnight rates have risen 3.5 percentage points since mid-2004, the market-set rate on 10-year U.S. government bonds has barely budged.

Bernanke said that if the low level of long-term rates reflected a decline in the compensation investors demanded to cover the risk of losses on long-term holdings, then it could signal stimulative financial conditions that would require higher short-term rates than otherwise to offset.

"But to the extent that long-term rates have been influenced by macroeconomic conditions, including such factors as trends in global saving and investment, the required policy rate will be lower," Bernanke said.

Little slowdown ahead

As he had in congressional testimony last month, Bernanke said he dd not consider the current flat yield curve - with yields on short-term debt close to yields on long-term bonds - as presaging "a significant economic slowdown" as has sometimes been the case in the past.

Indeed, he said other indicators showed markets with few worries on the future. "The fact that actual and implied volatilities of most financial prices remain subdued suggests that market participants do not harbor significant reservations about the economic outlook," he said.

He said, instead, long-term rates could suggest the level of short-term rates consistent with holding the economy at full employment had declined, perhaps reflecting a lasting drag on the economy from high energy costs, slower growth in house prices and the possibility consumers will begin to save more.

But he also noted long-term rates were low around the globe and said "an explanation less centered on the United States might be required."

One other factor that Bernanke raised, but downplayed, was that large official holdings of U.S. Treasury debt accumulated by countries intervening in currency markets was doing much to push U.S. long-term rates down.

"A reasonable conclusion is that the accumulation of dollar reserves abroad has influenced U.S. yields, but reserve accumulation abroad is not the only, or even the dominant, explanation for their recent behavior," he said.

In the end, Bernanke said the Fed would need to monitor bond yields carefully, but also had to take into account a wide array of other signals on the economy's health.

"Policy-makers are well advised to follow two principles familiar to navigators throughout the ages: First, determine your position frequently. Second, use as many guides or landmarks as possible," he said.

"By not tying policy to a small set of forecast indicators, we may sacrifice some degree of simplicity, but we are less likely to be misled when a favored variable behaves in an unusual manner," Bernanke added.


http://money.cnn.com/2006/03/20/news/economy/bernanke.reut/index.htm

[Bman]

Yields throw the Fed a curve

10-year Treasury yield slips below fed funds rate for first time since last recession, sparking debate about economy, Fed rate policy.

By Chris Isidore, CNNMoney.com senior writer.
May 24, 2006: 3:35 PM EDT


NEW YORK (CNNMoney.com) - Three of the scariest words in economics used to be "inverted yield curve."

The condition, which occurs when long-term interest rates are lower than short-term rates in the Treasury bond market, was once seen as a pretty clear signal of a recession ahead.


http://money.cnn.com/2006/05/24/news/economy/fed_yield_curve/fed_markets.gif

And while that's changed - many economists now say an inversion is more a sign of a slowing economy than a coming recession - the action in the bond market Wednesday morning had some experts saying the Federal Reserve may finally be forced to pause in its rate-hiking campaign so as not to upset financial markets.

"It's not among the top five things they're reading, but I don't think they're ignoring it totally," said Tom Schlesinger, executive director Financial Markets Center, a research firm that follows the Fed closely.

The inversion early Wednesday was different than the inversion that occurred late last year and early this year, when the 10-year Treasury yield fell below the yield on shorter-term Treasury securities.

Wednesday's inversion came as the 10-year yield fell briefly below the fed funds rate, the Fed's short-term rate target, currently 5 percent. It was the first time that's happened since April 2001, the last time the country was in a recession.

The 10-year yield dipped briefly below the fed funds rate Wednesday morning after a report showed a big drop in demand in April for cars, refrigerators and other big-ticket items known as durable goods.

But when a report on new home sales came in above forecasts 90 minutes later, the 10-year Treasury yield edged back above the 5 percent level.

"Ever since the Fed said decisions on future rate hikes would be data dependant, all of a sudden all the numbers matter," said Kevin Giddis, managing director of fixed income at Morgan Keegan.

And even if Fed officials have downplayed the threat of an inverted curve, some economists said the Fed will be reluctant to get too far ahead of where bond investors are betting rates will go.

Last winter, the Fed could keep raising rates without pushing the fed funds rate past the 10-year yield.

But in recent comments, Fed Chairman Ben Bernanke repeated the view expressed by his predecessor Alan Greenspan that an inverted yield curve is no longer a good indicator of a recession ahead.

"In previous episodes when an inverted yield curve was followed by recession, the level of interest rates was quite high, consistent with considerable financial restraint," Bernanke said in a speech in March. "This time, both short- and long-term interest rates -- in nominal and real terms -- are relatively low by historical standards."

Ian McCulley, analyst with Grant's Interest Rate Observer, a financial newsletter, said he doesn't think the Fed will feel constrained by the recent moves in the bond market.

"The curve (between the 3-month and 10-year) was inverted or flat earlier this year and they tightened into that," he said.

The narrow gap between long-term and short-term rates is something Greenspan famously referred to as a conundrum, and the flat or inverted yield curve seen Wednesday is just the latest example of that puzzle, experts said.

Even if there was more of a gap until recently, it was still narrow by historic standards, said Schlesinger. "I'm not sure how much the conundrum ever went away," he said.

It's also true that the inversion Wednesday was short-lived and relatively narrow. Some of the pre-recession inversions in the past were far more pronounced.

For example the gap between the 10-year yield and the fed funds rate were inverted for nearly 11 months and the gap reached 1.5 percentage points in January 2001, just before the Fed started cutting rates.

The recession that started in late 2000 lasted until the fall of 2001.

Still, an inverted yield curve is not something that can be ignored, the experts said.

"I think it would be healthy to be concerned, given the track record of the curve being a warning sign," said Schlesinger. "It's important not to be trapped by past patterns. But it (the inverted yield curve) does raise a question about how far the Fed has to tighten."

Giddis and Schlesinger both said they're skeptical that an inverted yield curve now will mean a recession later this year

More likely? It's signaling slower economic growth ahead. And maybe an end to Fed rate hikes sooner rather than later.


http://money.cnn.com/2006/05/24/news/economy/fed_yield_curve/index.htm

[Bman]

Good article here on the bond inversion and what it means


http://news.goldseek.com/MillenniumWaveAdvisors/1150068956.php