Question about the Yield Curve

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Saphomd
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Question about the Yield Curve

Post by Saphomd » Thu Dec 15, 2016 10:11 pm

I was recently reading an article online about the yield curve and how it can predict the future economy. It stated that in January 2006 the curve started to flatten. Then the yield on the 10 year note was 4.37% and how it then became inverted which in turn predicted the recession of 2008. Also in April of 2000, the inverted curve also predicted the recession of 2001.

I am not a believer of timing the market and no one really knows when stocks or bonds will go up/down. However, I am just curious what other Bogleheads think about the yield curve.

Thank you.

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patrick013
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Re: Question about the Yield Curve

Post by patrick013 » Thu Dec 15, 2016 10:16 pm

Saphomd wrote:I was recently reading an article online about the yield curve and how it can predict the future economy. It stated that in January 2006 the curve started to flatten. Then the yield on the 10 year note was 4.37% and how it then became inverted which in turn predicted the recession of 2008. Also in April of 2000, the inverted curve also predicted the recession of 2001.

I am not a believer of timing the market and no one really knows when stocks or bonds will go up/down. However, I am just curious what other Bogleheads think about the yield curve.

Thank you.


The yield curve isn't designed as a predictor, just what's going on.
age in bonds, buy-and-hold, 10 year business cycle

stlutz
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Re: Question about the Yield Curve

Post by stlutz » Thu Dec 15, 2016 10:36 pm

A recession is almost always preceded by yield curve inversion. Note that the opposite is not the case--the curve has frequently inverted with no recession.

The stock market is also a leading economic indicator. Which is another way of saying that yield curve inversion would not be a good market-timing tool.

robertalpert
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Re: Question about the Yield Curve

Post by robertalpert » Thu Dec 15, 2016 11:03 pm

Can you provide a link to the article that you are talking about?

Not too many on this forum would acknowledge the validity of yield curve predictions.

A book by Deborah Weir explains the specifics of yield curve usage.

Inverted yield curve has predicted 20 of the last 10 recessions. (many false positives). But when combined with other indicators ----- {Increased bond quality yield spread; put/call ratio changes} ----- it might become a better predictor.

Saphomd
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Location: SF, CA

Re: Question about the Yield Curve

Post by Saphomd » Thu Dec 15, 2016 11:15 pm

I read it on thebalance.com. Can't find the link. Not very good with computers :oops:

alex_686
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Re: Question about the Yield Curve

Post by alex_686 » Thu Dec 15, 2016 11:28 pm

3 points.

First, the yield curve expresses the collective wisdom of the market. Much in the same way as stock prices expresses the collective wisdom of the market. It is valuable information information but not a crystal ball. I tend to use it when calculating expected return and risk of assets.

Second, it predicts just not economic growth but inflation.

Third, the general consensus is that the market is undergoing a secular change so who knows what is going on. Theory suggests that rates should never get this low. Yet here we are. Something weird is happening. So historical examples and back testing may not help you out.

lack_ey
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Re: Question about the Yield Curve

Post by lack_ey » Thu Dec 15, 2016 11:51 pm

Here's a limited snapshot showing the spread between 10-year and 1-year Treasury yields (blue, left axis), kind of a proxy for yield curve slope. If negative, the 1-year has a higher yield and the yield curve is inverted. Shaded areas are recessions. Real GDP growth (red, right axis) is the other line.

Image

It doesn't have some of the older data, given availability of easily plottable Treasury bond yield series there, but some of that may not be as relevant. Or not.

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patrick013
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Re: Question about the Yield Curve

Post by patrick013 » Fri Dec 16, 2016 1:52 pm

What the Yield Curve Tells Us

I keep telling myself the yield curve is not inverted 90% of the time,
but there is usually a recession every ten years or so. From a buyer's
perspective I just look for higher spreads, and shock or spikes in the
FFR which do not look likely.
age in bonds, buy-and-hold, 10 year business cycle

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