One Ear to the Ground, One Eye to the Future

Treasury yields are attempting to say something.  But what it is exactly is open to interpretation.  What’s more, only the most curious care to ponder it. Like Southern California’s obligatory June Gloom, what Treasury yields may appear to be foreshadowing can be somewhat misleading.


Behold, the risk-free tide…


Are investors anticipating deflation or inflation?  Are yields adjusting to some other market or external phenomenon, perhaps central bank intervention?

So far this year, and in the face of the much-ballyhooed prospect of Trumpflation, the yield on the 10-Year note has gone down.  Not up.  On January 1st, the 10-Year note yielded 2.44 percent.  As of market close Thursday, the yield was 2.22 percent.

At first glance, it appears there’s nary a care in the world about inflation.  Conjecture, says there’s an expectation that Trump will be unsuccessful at getting his spending bill through Congress.  Without Trump’s fiscal stimulus, goes the thinking, the potential for inflation becomes muted.


10-year treasury note yield and 30 year t-bond yield – going the non-flationary way. In case you are wondering what the “but” is about: it’s current net speculative positioning in t-note futures, which has gone from record net short to record net long in a heartbeat – click to enlarge.


In reality, does this have anything to do with anything?  What are Treasury yields really trying to say?

To be clear, contemplating Treasury yields is like a baker contemplating the microbiology of bread yeast.  The proper technique is imprecise, and best garnered over time through learned experience.

We’ve found the best results for drawing an inkling from Treasury yields are obtained by putting one ear to the ground and one eye to the future.  Here’s what we mean…


A Flattening Yield Curve

If you plot the interest rates of Treasuries with different maturity dates you get a graph showing something that economist and banker types call a ‘yield curve.’

For example, if you plotted three-month, two-year, five-year, and 30-year Treasury debt you’d have a yield curve that is often used as a benchmark for establishing various lending rates.  More importantly, you can use the shape of the yield curve to forecast changes in economic growth.


Bad curve behavior returns – there isn’t much left of the “reflation” party – click to enlarge.


When everything’s just great with the economy, a normal yield curve, showing longer maturity Treasuries with a higher yield than shorter-term Treasuries, will appear.  This reflects the potential for greater market risk, and inflation, further out into the future.

However, prior to a recession the yield curve often becomes inverted, with shorter-term yields higher than longer-term yields. Presently, the Treasury yield curve is flattening.  Could it be transitioning to an inverted curve?  Here we turn to FXSTREET for instruction:


“Five years ago, long-term interest rates were just about where they are now, and short-term rates were nearly as low as the overnight federal funds rate (that is to say, at zero).

“At the end of 2014, when the Fed ended QE, short-term rates didn’t move much. But the middle of the yield curve moved higher.  Again, long-term yields are nearly the same today as they were in 2014.

“Finally, the current yield curve looks much flatter.  Short-term yields moved higher, mirroring the Fed’s rate hikes, and the middle of the curve has drifted higher.  But long-term rates are about where they were five years ago!

“That’s not encouraging.  Markets don’t believe there’s much risk of inflation or economic growth.”


We have shown this chart of 3 month and 10 year Japanese govt. debt previously, and is a bit of a warning: since 1989, there were five recessions in Japan that were not preceded by an inversion of the yield curve. The final stage of the big bubble in the Nikkei in 1989 was the last time the curve inverted in Japan. In a ZIRP regime a flattening of the curve is apparently all it takes sometimes – click to enlarge.


Recession Watch Fall 2017

Hence, according to the Treasury market, economic growth may be stalling out.  The Great Recession officially ended in June 2009.  Yet the recovery has not been equally great.  In fact, the recovery has been greatly feeble; it has hardly been discernible to the broad population.

The unemployment rate may have come down.  GDP may have inched up.  Incomes may have even returned to where they were at the turn of the new millennium.  But the wealth has generally concentrated with a small few, while everyone else has been left to fight over bread crumbs.

 When your stagnating income makes you feel blue, always remember that some species have a particularly complicated relationship with bread crumbs…


Moreover, unemployment, GDP, and incomes have all been blown about by the Fed’s odorous monetary gas.  Specifically, this is the same monetary gas that huffed and puffed up stock market and real estate prices, and suppressed interest rates.  So, too, this is the same monetary gas that the Fed has been incapable of weaning the economy from.

Could it be that we’re facing the prospects of another recession prior to the completion of Fed ‘normalization’ policies?  From our one ear to the ground one eye to the future vantage point you can already count on it.

Of course, many of the conditions that presaged the last recession – high levels of public and private debt, and asset bubbles – still exist today.  Only in many instances they’re even larger.  Naturally, the foolish attempt to solve a debt problem with more debt has now set us up for a much larger crisis and recession.

At the moment, this forthcoming recession is popping up like dark storm clouds just above the horizon.  By fall, it may be bearing down upon us in full force.


Charts by: StockCharts, St. Louis Fed


Chart and image captions by PT


MN Gordon is President and Founder of Direct Expressions LLC, an independent publishing company. He is the Editorial Director and Publisher of the Economic Prism – an E-Newsletter that tries to bring clarity to the muddy waters of economic policy and discusses interesting investment opportunities.




Emigrate While You Can... Learn More




Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.


Bitcoin address: 12vB2LeWQNjWh59tyfWw23ySqJ9kTfJifA


Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • US Stock Market: Conspicuous Similarities with 1929, 1987 and Japan in 1990
      Stretched to the Limit There are good reasons to suspect that the bull market in US equities has been stretched to the limit. These include inter alia: high fundamental valuation levels, as e.g. illustrated by the Shiller P/E ratio (a.k.a. “CAPE”/ cyclically adjusted P/E); rising interest rates; and the maturity of the advance.   The end of an era - a little review of the mother of modern crash patterns, the 1929 debacle. In hindsight it is both a bit scary and sad, in...
  • How to Blow $12.2 Billion in No Time Flat
      Fake Responses  One month ago we asked: What kind of stock market purge is this?  Over the last 30 days the stock market’s offered plenty of fake responses.  Yet we’re still waiting for a clear answer.   As the party continues, the dance moves of the revelers are becoming ever more ominous. Are they still right in the head? Perhaps a little trepanation is called for to relieve those brain tensions a bit?  [PT]   The stock market, like the President,...
  • Despondency in Silver-Land
      Speculators Throw the Towel Over the past several years we have seen a few amazing moves in futures positioning in a number of commodities, such as e.g. in crude oil, where the by far largest speculative long positions in history have been amassed. Over the past year it was silver's turn. In April 2017, large speculators had built up a record net long position of more than 103,000 contracts in silver futures with the metal trading at $18.30. At the end of February of this year, they held...
  • US Stock Market – The Flight to Fantasy
      Divergences Continue to Send Warning Signals The chart formation built in the course of the early February sell-off and subsequent rebound continues to look ominous, so we are closely watching the proceedings. There are now numerous new divergences in place that clearly represent a major warning signal for the stock market. For example, here is a chart comparing the SPX to the NDX (Nasdaq 100 Index) and the broad-based NYA (NYSE Composite Index).   The tech sector is always the...
  • Stock and Bond Markets - The Augustine of Hippo Plea
      Lord, Grant us Chastity and Temperance... Just Not Yet! Most fund managers are in an unenviable situation nowadays (particularly if they have a long only mandate). On the one hand, they would love to get an opportunity to buy assets at reasonable prices. On the other hand, should asset prices actually return to levels that could be remotely termed “reasonable”, they would be saddled with staggering losses from their existing exposure. Or more precisely: their investors would be saddled...
  • US Equities – Mixed Signals Battling it Out
      A Warning Signal from Market Internals Readers may recall that we looked at various market internals after the sudden sell-offs in August 2015 and January 2016 in order to find out if any of them had provided clear  advance warning. One that did so was the SPX new highs/new lows percent index (HLP). Below is the latest update of this indicator.   HLP (uppermost panel) provided advance warning prior to the sell-offs of August 2015 and January 2016 by dipping noticeably below the...
  • Return of the Market Criers - Precious Metals Supply and Demand
      Ballistically Yours One nearly-famous gold salesman blasted subscribers this week with, “Gold Is Going to Go Ballistic!” A numerologist shouted out the number $10,000. At the county fair this weekend, we ran out of pocket change, so we did not have a chance to see the Tarot Card reader to get a confirmation. The market criers are back in gold town [PT]   Even if you think that the price of gold is going to go a lot higher (which we do, by the way—but to lean on...
  • Good Riddance Lloyd Blankfein!
      One and the Same   “God gave me my money.” – John D. Rockefeller   Today we step away from the economy and markets and endeavor down the path less traveled.  For fun and for free, we wade out into a smelly peat bog.  There we scratch away the surface muck in search of what lies below.   One should actually be careful about quotes like the one attributed to Rockefeller above, even if it of course sounds good and is very suitable for the topic at...
  • Incrementum's New Cryptocurrency Research Report
      Another Highly Useful Report As we noted on occasion of the release of the first Incrementum Crypto Research Report, the report would become a regular feature. Our friends at Incrementum have just recently released the second edition, which you can download further below (if you missed the first report, see Cryptonite 2; scroll to the end of the article for the download link).   BTC hourly (at the Bitstamp exchange). Although BTC has been in a bear market since peaking in...
  • US Stock Market – How Bad Can It Get?
      SPX, Quo Vadis? Considering the Crash Potential In view of the fact that the stock market action has gotten a bit out of hand again this week, we are providing a brief update of charts we have discussed in these pages over the past few weeks (see e.g. “The Flight to Fantasy”). We are doing this mainly because the probability that a low probability event will actually happen has increased somewhat in recent days.   Robert Taylor and Deborah Kerr cast wary glances at their...
  • Yosemite Sam is Back!
      Dubious Picks Unless this is part of another cunning negotiation tactic, the Donald's recent cabinet nominations have to be considered highly dubious, to say the least. First he promoted Mike Pompeo from his CIA post to the position of Secretary of State – removing the eminently reasonable, and as we believe widely underappreciated Rex Tillerson. Pompeo is mainly known for sharing Trump's irrational dislike of the  nuclear deal with Iran, which was pretty much the only laudable policy...

Support Acting Man

Item Guides


Austrian Theory and Investment



THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

Realtime Charts


Gold in USD:

[Most Recent Quotes from]



Gold in EUR:

[Most Recent Quotes from]



Silver in USD:

[Most Recent Quotes from]



Platinum in USD:

[Most Recent Quotes from]



USD - Index:

[Most Recent USD from]


Buy Silver Now!
Buy Gold Now!

Diary of a Rogue Economist