Flatting Yield Curve - buckle up for the storm?

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cj2018
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Flatting Yield Curve - buckle up for the storm?

Post by cj2018 » Wed Jul 18, 2018 3:18 pm

I just read a good article on FS explaining the rationale behind a flatting or inverted yield curve and thought i'd share it here.

The flatting U.S. yield curve below really stood out to me as yet another strong signal the party music of the current cycle is beginning to come to an end as Fed continues ratcheting up short-term rates.

For someone like me who's still in the rat race and generating earned income from a MegaCorp job, the imminent recession (in 1-3 yrs) will be the first i would experience since becoming working full-time after college and becoming a BH! On one hand, i'm looking forward to putting all my knowledge to test and seeing if i can stay the course when the storm comes, on the other hand i'm also actively taking steps to minimize and protect myself when the inevitable happens in the late cycle that we are in - a.k.a saving like a mad person (over 60% after-tax paycheck) and other conventional wisdom such as keeping a healthy 6-12month EF and LBYM etc.

However, given unemployment is probably the biggest threat for ones in accumulation stage, I'd like to seek advice from experienced BHs (especially those who've played the management roles at big companies) with the following question:
  • How does the decision making look like when it comes to cost cutting (layoff or firing) during recession
  • How to minimize one's odds of layoff at work during recession?
Gracias, Señor!

Source: financialsamurai.com
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kaeltor
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Re: Flatting Yield Curve - buckle up for the storm?

Post by kaeltor » Wed Jul 18, 2018 5:09 pm

I am in your same shoes, saving around 60-70% of my income per month most of it in goes to Vanguard, so I'll be hit hard come recession time (3-fund portfolio).

Rest is in Ally savings.

Curious to see what the Veterans advise.

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Re: Flatting Yield Curve - buckle up for the storm?

Post by Grt2bOutdoors » Wed Jul 18, 2018 5:12 pm

Be an above average performer and chances are you keep your job. BUT, if your department, division is closed or sold - all bets are OFF!

Doesn’t hurt to be well liked by management either.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

Grt2bOutdoors
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Re: Flatting Yield Curve - buckle up for the storm?

Post by Grt2bOutdoors » Wed Jul 18, 2018 5:15 pm

kaeltor wrote:
Wed Jul 18, 2018 5:09 pm
I am in your same shoes, saving around 60-70% of my income per month most of it in goes to Vanguard, so I'll be hit hard come recession time (3-fund portfolio).

Rest is in Ally savings.

Curious to see what the Veterans advise.
Pick an appropriate asset allocation and stay the course. If you feel your employment is at imminent risk - redirect investment in taxable into savings, especially if you need the cash over next 1-3 years.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

livesoft
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Re: Flatting Yield Curve - buckle up for the storm?

Post by livesoft » Wed Jul 18, 2018 5:57 pm

OK, which bond funds will do best before the Recession is noticed and which one's will do best as the Recession is noticed and which one's will do best after the Recession is declared?
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grayfox
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Re: Flatting Yield Curve - buckle up for the storm?

Post by grayfox » Wed Jul 18, 2018 6:00 pm

To invert the yield curve, just keep raising the Fed Funds Rate like in 2004 - 2006. By Jul-2006 FEDFUNDS was 5.25% and stayed there until Jun-2007 when they started lowering. The Great Recession officially started about Dec-2007. From when the rate hit 5.25% until G.R. was 17 months.

https://fred.stlouisfed.org/series/FEDFUNDS

Right now at 1.82%.

Image

From chart above, it looks like Fed Funds rate only needs to get above about 3% to completely invert the yield curve, i.e. monotonically decreasing.

Where's that page that shows the probability of FED FUNDS rate at future dates. Is this it?
https://www.investing.com/central-banks ... te-monitor
or this?
https://www.frbatlanta.org/cenfis/marke ... px?panel=1

That says 87.8% chance of 2.00 - 2.25 by Sep 26, 2018
57.6% chance of 2.25 - 2.50 by Dec 19, 2018
Last edited by grayfox on Wed Jul 18, 2018 6:10 pm, edited 3 times in total.

bondsr4me
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Re: Flatting Yield Curve - buckle up for the storm?

Post by bondsr4me » Wed Jul 18, 2018 6:06 pm

If I were you, I would be following my company’s and it’s industry’s finances really closely.

If you are really low on the totem pole, I would be building up the emergency fund in case a layoff or termination comes.

No one can predict when the next recession will happen, but be assured it is coming and you want to be financially prepared.

Good luck. Keep with your plan.

KlangFool
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Re: Flatting Yield Curve - buckle up for the storm?

Post by KlangFool » Wed Jul 18, 2018 6:08 pm

livesoft wrote:
Wed Jul 18, 2018 5:57 pm
OK, which bond funds will do best before the Recession is noticed and which one's will do best as the Recession is noticed and which one's will do best after the Recession is declared?
Short-term treasury for all 3 cases?

KlangFool

JoeRetire
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Re: Flatting Yield Curve - buckle up for the storm?

Post by JoeRetire » Wed Jul 18, 2018 6:09 pm

cj2018 wrote:
Wed Jul 18, 2018 3:18 pm
The flatting U.S. yield curve below really stood out to me as yet another strong signal the party music of the current cycle is beginning to come to an end as Fed continues ratcheting up short-term rates.
Or it could just be a false alarm.

cj2018
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Re: Flatting Yield Curve - buckle up for the storm?

Post by cj2018 » Wed Jul 18, 2018 6:09 pm

Grt2bOutdoors wrote:
Wed Jul 18, 2018 5:12 pm
Be an above average performer and chances are you keep your job. BUT, if your department, division is closed or sold - all bets are OFF!

Doesn’t hurt to be well liked by management either.
Yes true - being liked by management is indeed very important!

cj2018
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Re: Flatting Yield Curve - buckle up for the storm?

Post by cj2018 » Wed Jul 18, 2018 6:11 pm

grayfox wrote:
Wed Jul 18, 2018 6:00 pm
To invert the yield curve, just keep raising the Fed Funds Rate like in 2004 - 2006. By Jul-2006 FEDFUNDS was 5.25% and stayed there until Jun-2007 when they started lowering. The Great Recession officially started about Dec-2007. From when the rate hit 5.25% until G.R. was 17 months.

https://fred.stlouisfed.org/series/FEDFUNDS

Right now at 1.82%.

Image

From chart above, it looks like Fed Funds rate only needs to get above about 3% to completely invert the yield curve, i.e. monotonically decreasing.

Where's that page that shows the probability of FED FUNDS rate at future dates. Is this it?
https://www.investing.com/central-banks ... te-monitor
or this?
https://www.frbatlanta.org/cenfis/marke ... px?panel=1

That says 87.8% chance of 2.00 - 2.25 by Sep 26, 2018
Interesting references, thanks.

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grayfox
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Re: Flatting Yield Curve - buckle up for the storm?

Post by grayfox » Wed Jul 18, 2018 6:15 pm

Vanguard Prime Money Market Fund (VMMXX) with SEC Yield = 2.05% looks pretty good. Average maturity = 49 days.

As Fed Funds Rate rises, VMMXX stays a little above it.We might be getting 2.5% by the end of 2018! :beer

KlangFool
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Re: Flatting Yield Curve - buckle up for the storm?

Post by KlangFool » Wed Jul 18, 2018 6:17 pm

OP,

A) If the stock market goes down 50% and stay down for n number of years and the person is unemployed at the same time, how long before the person is totally wiped out?

B) If the stock market goes down 50% and stay down for n number of years and the person is unemployed at the same time, how long before the person needs to sell stock at a loss?

C) If the stock market goes down 50% and stay down for n number of years and the person is unemployed at the same time, how long before the person needs to sell any investment for the monthly expense?

Those are the stress tests that I run every year.

KlangFool

Dottie57
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Re: Flatting Yield Curve - buckle up for the storm?

Post by Dottie57 » Wed Jul 18, 2018 6:20 pm

What is FS?

livesoft
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Re: Flatting Yield Curve - buckle up for the storm?

Post by livesoft » Wed Jul 18, 2018 6:22 pm

grayfox wrote:
Wed Jul 18, 2018 6:00 pm
Where's that page that shows the probability of FED FUNDS rate at future dates. Is this it?
I use this, but they are probably all pretty much the same:
https://www.cmegroup.com/trading/intere ... -fomc.html
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cj2018
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Re: Flatting Yield Curve - buckle up for the storm?

Post by cj2018 » Wed Jul 18, 2018 6:22 pm

grayfox wrote:
Wed Jul 18, 2018 6:15 pm
Vanguard Prime Money Market Fund (VMMXX) with SEC Yield = 2.05% looks pretty good. Average maturity = 49 days.

As Fed Funds Rate rises, VMMXX stays a little above it.We might be getting 2.5% by the end of 2018! :beer
Well based on yesterday's comment by Fed's Powell, the scheduled rate hike is still on for the remaining year so 2.5% is certainly likely. :beer

cj2018
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Re: Flatting Yield Curve - buckle up for the storm?

Post by cj2018 » Wed Jul 18, 2018 6:25 pm

Dottie57 wrote:
Wed Jul 18, 2018 6:20 pm
What is FS?
Oh it's short for financialsamurai, the blog to which the yield curve i was referring

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Re: Flatting Yield Curve - buckle up for the storm?

Post by Dottie57 » Wed Jul 18, 2018 6:30 pm

Every manager I worked for at megacorp ranked his subordinates . Those on the bottom of the list were the first to go in a kayoff situation. Make yourself more valuable and employable each and every day.

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Re: Flatting Yield Curve - buckle up for the storm?

Post by 2comma » Wed Jul 18, 2018 6:39 pm

bondsr4me wrote:
Wed Jul 18, 2018 6:06 pm
If I were you, I would be following my company’s and it’s industry’s finances really closely.

If you are really low on the totem pole, I would be building up the emergency fund in case a layoff or termination comes.

No one can predict when the next recession will happen, but be assured it is coming and you want to be financially prepared.

Good luck. Keep with your plan.
Worked for me twice! Employed by a company that had never made a profit and was a subsidiary of a company bought out by GE when "neutron Jack" is at the helm, you better be looking. Second time worked for a company that was the largest hotel/motel outfit in the US with only 6 casinos that garnered 48% of their profits. Some smart CEO might just want to sell off the sluggish side and concentrate on the growing side. In both cases I was gettin while the gettin was good. Compared to those who stayed my paying attention to the business side made a huge difference in my net worth and quality of life.
If I am stupid I will pay.

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whodidntante
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Re: Flatting Yield Curve - buckle up for the storm?

Post by whodidntante » Wed Jul 18, 2018 7:07 pm

I wear a helmet a lot.

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Cyclesafe
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Re: Flatting Yield Curve - buckle up for the storm?

Post by Cyclesafe » Wed Jul 18, 2018 7:11 pm

At Megacorp we had employees categorized as essential, high performer, and other. The last category had one year to get into one of the others. If you were a member of a coddled class or had a well-placed mentor you had a bit longer....

My advice an employee of Megacorp is to always assume you will be laid off next year. Establish outside contacts with the conviction that you will definitely be asking them in the future for a job. Keep the resume and the unemployed mindset sharp. Don't assume anything. Your mentor gets the axe; you'll be pushed out too. Your division is dropped or sold, don't assume there will be a lifeline thrown to you.

The people you work with are NOT your friends. Figure out where you are and where you need to be in the pecking order and act accordingly.

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Re: Flatting Yield Curve - buckle up for the storm?

Post by nisiprius » Wed Jul 18, 2018 7:17 pm

We don't have an inverted yield curve. We have a "normal" yield curve:
Dynamic Yield Curve
Image

So, to justify taking specific actions, you need to parlay several predictions.
  • You must predict changes in two different interest rates...
  • ...predict that they will change in such a way that it will produce an inverted yield curve...
  • ...and believe that an inverted yield curve predicts a recession.
Now in point of fact predictions of interest rate changes are terrible. People try to make them because the financial rewards from successful predictions are good, but... in February of 2014, Bloomberg polled 68 economists for their predictions of what the ten-year Treasury rate would be in six months.

All sixty-eight of them unanimously predicted that the rate would rise, the only question being by how much.

The ten-year Treasury rate fell.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

cj2018
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Re: Flatting Yield Curve - buckle up for the storm?

Post by cj2018 » Wed Jul 18, 2018 7:47 pm

Cyclesafe wrote:
Wed Jul 18, 2018 7:11 pm
At Megacorp we had employees categorized as essential, high performer, and other. The last category had one year to get into one of the others. If you were a member of a coddled class or had a well-placed mentor you had a bit longer....

My advice an employee of Megacorp is to always assume you will be laid off next year. Establish outside contacts with the conviction that you will definitely be asking them in the future for a job. Keep the resume and the unemployed mindset sharp. Don't assume anything. Your mentor gets the axe; you'll be pushed out too. Your division is dropped or sold, don't assume there will be a lifeline thrown to you.

The people you work with are NOT your friends. Figure out where you are and where you need to be in the pecking order and act accordingly.
Thanks Cyclesafe! This is helpful.

I've always been a high performer and liked by my immediate reporting line, so my main concern would be primarily regarding "what if my mentor gets the axe" since that's largely out of my control what happens 2 level up and it's not easy to pick sides when you are out of the inner party.

Always keep an active network you can tap in case of unemployment is always solid advice.

The "Assuming one will be laid off next year" mindset is interesting and never occurred to me - will have to give it more thoughts.

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Re: Flatting Yield Curve - buckle up for the storm?

Post by danielc » Wed Jul 18, 2018 10:35 pm

KlangFool wrote:
Wed Jul 18, 2018 6:17 pm
OP,

A) If the stock market goes down 50% and stay down for n number of years and the person is unemployed at the same time, how long before the person is totally wiped out?

B) If the stock market goes down 50% and stay down for n number of years and the person is unemployed at the same time, how long before the person needs to sell stock at a loss?

C) If the stock market goes down 50% and stay down for n number of years and the person is unemployed at the same time, how long before the person needs to sell any investment for the monthly expense?

Those are the stress tests that I run every year.
That seems to imply that if there are two incomes in the family where either income can cover 100% of expenses, you can tolerate a 100% stock allocation.

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Re: Flatting Yield Curve - buckle up for the storm?

Post by KlangFool » Thu Jul 19, 2018 6:20 am

danielc wrote:
Wed Jul 18, 2018 10:35 pm
KlangFool wrote:
Wed Jul 18, 2018 6:17 pm
OP,

A) If the stock market goes down 50% and stay down for n number of years and the person is unemployed at the same time, how long before the person is totally wiped out?

B) If the stock market goes down 50% and stay down for n number of years and the person is unemployed at the same time, how long before the person needs to sell stock at a loss?

C) If the stock market goes down 50% and stay down for n number of years and the person is unemployed at the same time, how long before the person needs to sell any investment for the monthly expense?

Those are the stress tests that I run every year.
That seems to imply that if there are two incomes in the family where either income can cover 100% of expenses, you can tolerate a 100% stock allocation.
No. In that case, assume both are unemployed. The goal is to understand under the worst case, how long can a person survive?


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motorcyclesarecool
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Re: Flatting Yield Curve - buckle up for the storm?

Post by motorcyclesarecool » Thu Jul 19, 2018 6:58 am

At the Dow component Megacorp where I worked, some people would hoard knowledge in an attempt to make themselves indispensable. They tended to be the first to go in a layoff. Be a good team player. The ones with better soft skills tended to be the ones who stayed. Edited to add: Assuming at least a basic level competence.
Understand that choosing an HDHP is very much a "red pill" approach. Most would rather pay higher premiums for a $20 copay per visit. They will think you weird for choosing an HSA.

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Flymore
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Re: Flatting Yield Curve - buckle up for the storm?

Post by Flymore » Thu Jul 19, 2018 8:22 am

motorcyclesarecool wrote:
Thu Jul 19, 2018 6:58 am
At the Dow component Megacorp where I worked, some people would hoard knowledge in an attempt to make themselves indispensable. They tended to be the first to go in a layoff. Be a good team player. The ones with better soft skills tended to be the ones who stayed. Edited to add: Assuming at least a basic level competence.
My last years at the megacorp, they gave me the "associates" because the younger workers didn't want to be "shadowed" probably because they wanted to hoard knowledge. Had a total of 8 associated, 3-2-3, I told them, "take my job please"! In today's work environment, I see a lot of hoarding of knowledge! Perhaps this is the value of having an older worker? The megacorp didn't see it, I left. In my youth, was told flat out - if you do not mentor you're gone!

Anyway, market timing is a big PIA. Every time I've tried market timing it hasn't worked! :shock:

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grayfox
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Re: Flatting Yield Curve - buckle up for the storm?

Post by grayfox » Thu Jul 19, 2018 9:24 am

Here is what I see today:

Code: Select all

Date		1 Mo	3 Mo	6 Mo	1 Yr	2 Yr	3 Yr	5 Yr	7 Yr	10 Yr	20 Yr	30 Yr
07/18/18	1.90	2.00	2.17	2.43	2.60	2.69	2.77	2.84	2.88	2.93	2.99
Diff (bps)		10	17	26	17	9	8	7	4	5	6

https://www.treasury.gov/resource-cente ... data=yield

The slope is still positive all the way.

At the beginning of year:

Code: Select all

Date		1 Mo	3 Mo	6 Mo	1 Yr	2 Yr	3 Yr	5 Yr	7 Yr	10 Yr	20 Yr	30 Yr
01/02/18	1.29	1.44	1.61	1.83	1.92	2.01	2.25	2.38	2.46	2.64	2.81
Diff (bps)		15	17	22	9	9	24	13	8	18	17
It got flatter, but is still monotonically increasing. I would look for some negative numbers before calling it inverted. See what happens at the next FOMC meeting on August 1st.

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