Flattening yield curve

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Kennyt7
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Flattening yield curve

Post by Kennyt7 » Wed Oct 03, 2018 11:47 am

Anyone feel this is leading to RECESSION?

misterno
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Re: FLATTENING YIELD CURVE

Post by misterno » Wed Oct 03, 2018 12:08 pm

how can there be a recession when we have robust growth and record low unemployment?

I guess yield curve does not always indicate something

masteraleph
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Re: FLATTENING YIELD CURVE

Post by masteraleph » Wed Oct 03, 2018 12:13 pm

Possibly, but in the longer term. That is, I wouldn't expect a recession in the next 12 months, but it also wouldn't shock me to see one in the next two years. Spikes in real estate prices and higher mortgage rates and corresponding decreases in demand and increases in inventory point in the same direction, and are obviously linked to the rising fed rate, as well.

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Re: FLATTENING YIELD CURVE

Post by sandramjet » Wed Oct 03, 2018 12:16 pm

I'm sure this is leading to a recession... problem is, I have no idea when or for how long or how bad...

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Re: FLATTENING YIELD CURVE

Post by SelfEmployed123 » Wed Oct 03, 2018 12:18 pm

Kennyt7 wrote:
Wed Oct 03, 2018 11:47 am
Anyone feel this is leading to RECESSION?
There is a 100% chance that the yield curve will become inverted in the future. There is a 100% chance that there will be a recession in the future. No one knows when either will occur. The best course of action is to look at your asset allocation. Can you sleep at night right now given these circumstances? If not, you may want to take less risk. Otherwise, just stay the course.
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Re: FLATTENING YIELD CURVE

Post by livesoft » Wed Oct 03, 2018 12:24 pm

I don't know about a recession, but bond funds have dropped more than 0.4% today, so it is a buying opportunity!
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Re: FLATTENING YIELD CURVE

Post by oldcomputerguy » Wed Oct 03, 2018 12:27 pm

Kennyt7 wrote:
Wed Oct 03, 2018 11:47 am
Anyone feel this is leading to RECESSION?
Sooner or later.
It’s taken me a lot of years, but I’ve come around to this: If you’re dumb, surround yourself with smart people. And if you’re smart, surround yourself with smart people who disagree with you.

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Re: FLATTENING YIELD CURVE

Post by indexfundfan » Wed Oct 03, 2018 12:29 pm

Long term treasuries getting hammered today. Should help some in "un-flattening" the yield curve. :-)
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JoeRetire
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Re: FLATTENING YIELD CURVE

Post by JoeRetire » Wed Oct 03, 2018 12:50 pm

Kennyt7 wrote:
Wed Oct 03, 2018 11:47 am
Anyone feel this is leading to RECESSION?
HOW LONG HAS THE YIELD CURVE BEEN FLATTENING?

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Re: FLATTENING YIELD CURVE

Post by PDX_Traveler » Wed Oct 03, 2018 2:19 pm

misterno wrote:
Wed Oct 03, 2018 12:08 pm
how can there be a recession when we have robust growth and record low unemployment?

I guess yield curve does not always indicate something
I guess GDP growth can be healthy until it isn't, and the stock market can be quick to react/anticipate in both the up and down directions. From March-->Jun-->Sep 2008, GDP growth went from 1.15%-->1.09%-->0% and the S&P plummeted in Sep/Oct. In March 2009, with two more quarters of negative GDP growth ahead of us, the S&P put in a 'secular' bottom. I doubt most investors or economists were seeing these events happen in the moment, only in retrospect. History may not always repeat, but certainly rhymes.
So, as many posters have said in this and other forums, reading the tea leaves is at best a random process with uncertain predictions. Pick a reasonable course and stay it, is hard to improve upon - something I've learnt painfully, at least.

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Re: FLATTENING YIELD CURVE

Post by TheAccountant » Wed Oct 03, 2018 2:36 pm

misterno wrote:
Wed Oct 03, 2018 12:08 pm
how can there be a recession when we have robust growth and record low unemployment?

I guess yield curve does not always indicate something
Because the "robust growth" and record low unemployment is based off of unsustainable interest rates and a stimulus package that has come to an end.

Also, it takes time for this stuff to happen. The yield curve doesn't just invert and you wake up the next day to a recession.

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Re: FLATTENING YIELD CURVE

Post by RCL » Wed Oct 03, 2018 3:02 pm

livesoft wrote:
Wed Oct 03, 2018 12:24 pm
I don't know about a recession, but bond funds have dropped more than 0.4% today, so it is a buying opportunity!
Noticed this as well......and added to allocation
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Re: FLATTENING YIELD CURVE

Post by corn18 » Wed Oct 03, 2018 3:46 pm

JoeRetire wrote:
Wed Oct 03, 2018 12:50 pm
Kennyt7 wrote:
Wed Oct 03, 2018 11:47 am
Anyone feel this is leading to RECESSION?
HOW LONG HAS THE YIELD CURVE BEEN FLATTENING?
Image

Minderbinder
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Re: Flattening yield curve

Post by Minderbinder » Wed Oct 03, 2018 3:57 pm

Well, it sure didn't flatten today. It's north of 30 for the first time in a long while.

There is some evidence that a yield curve inversion is predictive of GDP and equity returns.

https://fattailedandhappy.com/yield-cur ... o-predict/

am
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Re: Flattening yield curve

Post by am » Wed Oct 03, 2018 4:33 pm

I doubt this indicator like all others is actionable in any way or can be used for market timing. Stay the course.

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Re: Flattening yield curve

Post by sperry8 » Wed Oct 03, 2018 4:41 pm

am wrote:
Wed Oct 03, 2018 4:33 pm
I doubt this indicator like all others is actionable in any way or can be used for market timing. Stay the course.
I disagree. From all I've read it is quite actionable - but only when it goes negative. Not when it is on the way to negative or is flattening. And you must look at the proper yield curve. The global yield curve would be the best and you'd want to look at 3mo (or if you can find it, shorter) vs 10. Not 2/10. Not 1/10.
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HomerJ
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Re: FLATTENING YIELD CURVE

Post by HomerJ » Wed Oct 03, 2018 4:45 pm

TheAccountant wrote:
Wed Oct 03, 2018 2:36 pm
misterno wrote:
Wed Oct 03, 2018 12:08 pm
how can there be a recession when we have robust growth and record low unemployment?

I guess yield curve does not always indicate something
Because the "robust growth" and record low unemployment is based off of unsustainable interest rates and a stimulus package that has come to an end.

Also, it takes time for this stuff to happen. The yield curve doesn't just invert and you wake up the next day to a recession.
Wasn't there just a new "stimulus package" passed? (i.e. tax cuts)
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Re: Flattening yield curve

Post by JDDS » Wed Oct 03, 2018 5:53 pm

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JoeRetire
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Re: FLATTENING YIELD CURVE

Post by JoeRetire » Thu Oct 04, 2018 6:42 am

corn18 wrote:
Wed Oct 03, 2018 3:46 pm
JoeRetire wrote:
Wed Oct 03, 2018 12:50 pm
Kennyt7 wrote:
Wed Oct 03, 2018 11:47 am
Anyone feel this is leading to RECESSION?
HOW LONG HAS THE YIELD CURVE BEEN FLATTENING?
Image
Pretty picture. Does it answer the question?

How do you define "flattening" in this context?
How long has it been happening recently?

Seems you'd need to know both of these to answer the question of "... leading to recession?", no?

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corn18
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Re: FLATTENING YIELD CURVE

Post by corn18 » Thu Oct 04, 2018 7:31 am

JoeRetire wrote:
Thu Oct 04, 2018 6:42 am
corn18 wrote:
Wed Oct 03, 2018 3:46 pm
JoeRetire wrote:
Wed Oct 03, 2018 12:50 pm
Kennyt7 wrote:
Wed Oct 03, 2018 11:47 am
Anyone feel this is leading to RECESSION?
HOW LONG HAS THE YIELD CURVE BEEN FLATTENING?
Image
Pretty picture. Does it answer the question?

How do you define "flattening" in this context?
How long has it been happening recently?

Seems you'd need to know both of these to answer the question of "... leading to recession?", no?
I guess I'll read the cart for you.

A negative slope = flattening curve (that means the line is going down)
It has been flattening since late 2015.

If I knew when a recession was coming, I wouldn't need to be on this forum. I just wanted to contribute to the low level noise that seems to dominate a forum based on simplicity. We sure talk a lot about stuff that is meaningless.

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Re: Flattening yield curve

Post by bottlecap » Thu Oct 04, 2018 12:48 pm

It's coming at the end of 2019. You heard it here first.

JT

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willthrill81
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Re: Flattening yield curve

Post by willthrill81 » Thu Oct 04, 2018 1:20 pm

A flat yield curve does not portend a recession. An inverted yield curve often has.
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Re: Flattening yield curve

Post by edgeagg » Thu Oct 04, 2018 3:00 pm

willthrill81 wrote:
Thu Oct 04, 2018 1:20 pm
A flat yield curve does not portend a recession. An inverted yield curve often has.
I'll now don my asbestos pantaloons. The graph below shows the time adjusted (to month) yield spreads for the period from 1980 to 2018 (as of yesterday). Recessions are marked on the graph. Spreads have been normalized to account for the interval - 1 month in this case to reflect the marginal utility of holding a security for an extra month.

Image

As willthrill says, an inverted yield curve has presaged recessions (and this is in keeping with a Vanguard analysis - here.

The more readable version of the graph is here.

EDIT: I'll be glad to share my R code that I used to generate these graphs once I clean it up. PM me if you want it.
ea

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Re: FLATTENING YIELD CURVE

Post by JoeRetire » Thu Oct 04, 2018 3:07 pm

corn18 wrote:
Thu Oct 04, 2018 7:31 am
I guess I'll read the cart for you.
Thanks. The questions were more for the OP, but thanks anyway.
It has been flattening since late 2015.
Yup, flattening. For years.
If I knew when a recession was coming, I wouldn't need to be on this forum. I just wanted to contribute to the low level noise that seems to dominate a forum based on simplicity. We sure talk a lot about stuff that is meaningless.
Agreed. Appreciate your contribution.

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Phineas J. Whoopee
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Re: Flattening yield curve

Post by Phineas J. Whoopee » Thu Oct 04, 2018 3:44 pm

Kennyt7 wrote:
Wed Oct 03, 2018 11:47 am
Anyone feel this is leading to RECESSION?
I have no feelings either way. I created a plan for all foreseeable weather, and stick to it, and realize a bad thing could happen to me from which I couldn't possibly recover.

I suppose, not feel, that a flattening yield curve is an effect, not a cause.

PJW

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Re: FLATTENING YIELD CURVE

Post by NYCwriter » Thu Oct 04, 2018 4:04 pm

RCL wrote:
Wed Oct 03, 2018 3:02 pm
livesoft wrote:
Wed Oct 03, 2018 12:24 pm
I don't know about a recession, but bond funds have dropped more than 0.4% today, so it is a buying opportunity!
Noticed this as well......and added to allocation
So did I. The shorter end is holding up, though.

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Kevin M
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Re: Flattening yield curve

Post by Kevin M » Thu Oct 04, 2018 5:31 pm

willthrill81 wrote:
Thu Oct 04, 2018 1:20 pm
A flat yield curve does not portend a recession. An inverted yield curve often has.
I would say that this is not necessarily true if we look at the FRED 10-2 chart above. For the last three recessions (shaded in gray on the FRED chart), the 10-2 yield curve has been flat, then inverted, then flat again (and then even slightly positive) before the start of the recession. But the timing isn't consistent, so I think it may not be particularly effective to use as a market-timing indicator.

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Re: Flattening yield curve

Post by edgeagg » Thu Oct 04, 2018 5:35 pm

Phineas J. Whoopee wrote:
Thu Oct 04, 2018 3:44 pm
I have no feelings either way. I created a plan for all foreseeable weather, and stick to it, and realize a bad thing could happen to me from which I couldn't possibly recover.

I suppose, not feel, that a flattening yield curve is an effect, not a cause.

PJW
Historically, a flattening curve doesn't mean anything, but an inverted one has preceded all 7 US recessions . And it would be hard for it to be an effect, if it preceded a recession.

That said, there is absolutely no disagreement from me on having a IP and sticking to it - namely not panicking.

EDIT: Meant to say all of the last 7 US recessions.

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Re: Flattening yield curve

Post by willthrill81 » Thu Oct 04, 2018 6:10 pm

Kevin M wrote:
Thu Oct 04, 2018 5:31 pm
willthrill81 wrote:
Thu Oct 04, 2018 1:20 pm
A flat yield curve does not portend a recession. An inverted yield curve often has.
I would say that this is not necessarily true if we look at the FRED 10-2 chart above. For the last three recessions (shaded in gray on the FRED chart), the 10-2 yield curve has been flat, then inverted, then flat again (and then even slightly positive) before the start of the recession. But the timing isn't consistent, so I think it may not be particularly effective to use as a market-timing indicator.

Kevin
Hence my use of the word "often."
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Re: Flattening yield curve

Post by stlutz » Thu Oct 04, 2018 6:29 pm

I suppose, not feel, that a flattening yield curve is an effect, not a cause.
Banks borrow short and lend long. If they have to borrow at rates that are higher than they can lend at, they won't lend. No bank lending can help provoke a recession.

So, I think it actually can be a cause.

Couldn't see that it's been noted above, but historically the better recession predictor has come from comparing 3 month T-bills vs. the 10 year. The difference between those two today is just shy of 1%, so not even close to being inverted.

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Re: Flattening yield curve

Post by JoeRetire » Thu Oct 04, 2018 6:53 pm

edgeagg wrote:
Thu Oct 04, 2018 5:35 pm
Historically, a flattening curve doesn't mean anything, but an inverted one has preceded all 7 US recessions .
A flattening curve has also preceded all of the last 7 US recessions.
And it would be hard for it to be an effect, if it preceded a recession.
Both the inversion as well as the recession could easily be effects at the same time. Just not effects of each other.

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Re: Flattening yield curve

Post by wootwoot » Thu Oct 04, 2018 7:08 pm

On a long enough timeline the survival rate for everyone drops to 0.

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Re: Flattening yield curve

Post by edgeagg » Thu Oct 04, 2018 9:09 pm

JoeRetire wrote:
Thu Oct 04, 2018 6:53 pm
A flattening curve has also preceded all of the last 7 US recessions.
And it would be hard for it to be an effect, if it preceded a recession.
Both the inversion as well as the recession could easily be effects at the same time. Just not effects of each other.
(1) A flattening curve happens without a recession but a inversion has never happened otherwise.
(2) And I also refer you to the Vanguard paper that I linked to earlier. And I don't comprehend your statement about effects of each other since I have no idea as to what that could be. What are your hypotheses?

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Re: Flattening yield curve

Post by Nate79 » Thu Oct 04, 2018 9:25 pm

So if a flattening or inverted yield curve maybe causes a recession what causes the yield curve to be flat or inverted in the first place? Happening at the same time and causation are not the same thing.

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Re: Flattening yield curve

Post by venkman » Thu Oct 04, 2018 9:35 pm

Nate79 wrote:
Thu Oct 04, 2018 9:25 pm
So if a flattening or inverted yield curve maybe causes a recession what causes the yield curve to be flat or inverted in the first place? Happening at the same time and causation are not the same thing.
An inverted yield curve doesn't cause a recession; it's the result of the market predicting a recession. The market thinks a recession is coming, and that the Fed will sharply cut the Federal Funds Rate. No one wants to be stuck with short term bonds that will likely end up having to be reinvested at much lower rates, so people move money out of short term bonds (increasing their yield) and into intermediate and long term bonds (depressing those yields).

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Re: Flattening yield curve

Post by stlutz » Thu Oct 04, 2018 10:25 pm

This article explains pretty succinctly how an inverted yield curve causes a recession:

https://www.financialsamurai.com/unders ... predictor/

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prospect-refuge
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Re: FLATTENING YIELD CURVE

Post by prospect-refuge » Thu Oct 04, 2018 11:51 pm

misterno wrote:
Wed Oct 03, 2018 12:08 pm
how can there be a recession when we have robust growth and record low unemployment?
Record-low unemployment is definitely a predictor of recession. Not nearly as strong an indicator as yield spreads, but still predictive. It has to do with "late-cycle" conditions. Labor is getting more expensive.

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Re: Flattening yield curve

Post by edgeagg » Fri Oct 05, 2018 11:35 am

Just to be clear: Whether an inverting curve causes or does not cause a recession, I don't really know, and financialsamurai's argument seems rational, though not backed up with data.

I was merely observing that the phenomenon was incipient. Will it make a difference in my asset mix when it happens? Yes. But that may not be the same answer for everyone and I am OK with that since I have no messianic leanings - I just happen to like :beer.

That said, if you read the VG paper that speaks to this (linked in an earlier post), then the time between the inversion and the recession varies between 8 and 17 months. Given that recessions tend to last for a couple of years, it seems to me that holding 4-5 year bonds should help me with releasing money to pick up cheaper equity when we come out of recession since the Fed will probably have been in a QE regime (meaning that interest bearing bonds with reasonable term left should command a premium)......

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Re: Flattening yield curve

Post by patrick013 » Fri Oct 05, 2018 12:04 pm

venkman wrote:
Thu Oct 04, 2018 9:35 pm
Nate79 wrote:
Thu Oct 04, 2018 9:25 pm
So if a flattening or inverted yield curve maybe causes a recession what causes the yield curve to be flat or inverted in the first place? Happening at the same time and causation are not the same thing.
An inverted yield curve doesn't cause a recession; it's the result of the market predicting a recession. The market thinks a recession is coming, and that the Fed will sharply cut the Federal Funds Rate. No one wants to be stuck with short term bonds that will likely end up having to be reinvested at much lower rates, so people move money out of short term bonds (increasing their yield) and into intermediate and long term bonds (depressing those yields).
Image

Although slightly sloping this basic graph I think is still in danger of inverting.
Most long spreads are below their long term averages.
age in bonds, buy-and-hold, 10 year business cycle

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Re: Flattening yield curve

Post by JoeRetire » Fri Oct 05, 2018 6:37 pm

edgeagg wrote:
Thu Oct 04, 2018 9:09 pm
JoeRetire wrote:
Thu Oct 04, 2018 6:53 pm
A flattening curve has also preceded all of the last 7 US recessions.
And it would be hard for it to be an effect, if it preceded a recession.
Both the inversion as well as the recession could easily be effects at the same time. Just not effects of each other.
(1) A flattening curve happens without a recession but a inversion has never happened otherwise.
(2) And I also refer you to the Vanguard paper that I linked to earlier. And I don't comprehend your statement about effects of each other since I have no idea as to what that could be. What are your hypotheses?
There are causes and effects.

Something that causes a recession could also cause a flattening yield curve or yield curve inversion.

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Re: Flattening yield curve

Post by aristotelian » Fri Oct 05, 2018 7:47 pm

stlutz wrote:
Thu Oct 04, 2018 10:25 pm
This article explains pretty succinctly how an inverted yield curve causes a recession:

https://www.financialsamurai.com/unders ... predictor/
The article says "predicts", not causes.

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Re: Flattening yield curve

Post by edgeagg » Fri Oct 05, 2018 9:35 pm

JoeRetire wrote:
Fri Oct 05, 2018 6:37 pm

Something that causes a recession could also cause a flattening yield curve or yield curve inversion.
That is why I asked you to provide your hypothesis for what this mysterious something is :P. The Recession Fairy? Something else? There seem to be other valid hypotheses that were presented earlier - eg the financialsamurai blog, VG paper. Since you don't seem to believe in said hypotheses, I am merely asking for what your "something" is....

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Re: Flattening yield curve

Post by JoeRetire » Sat Oct 06, 2018 7:25 am

edgeagg wrote:
Fri Oct 05, 2018 9:35 pm
JoeRetire wrote:
Fri Oct 05, 2018 6:37 pm

Something that causes a recession could also cause a flattening yield curve or yield curve inversion.
That is why I asked you to provide your hypothesis for what this mysterious something is :P. The Recession Fairy? Something else? There seem to be other valid hypotheses that were presented earlier - eg the financialsamurai blog, VG paper. Since you don't seem to believe in said hypotheses, I am merely asking for what your "something" is....
I'm trying to explain cause and effect for you.

I don't pretend to understand the cause of recessions. I'm guessing it's not a Recession Fairy, so I suppose I'll vote for Something Else.

I do understand that both recessions and inverted yield curve could be the effect - neither has to be the cause.

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Re: Flattening yield curve

Post by Phineas J. Whoopee » Sat Oct 06, 2018 12:12 pm

Thank you, JoeRetire, for continuing to make the point I made.

If anybody doesn't understand how yield curve changes and recessions can both be effects of yet a third thing, with neither of the first two causing the other, they may want to read this article on confounding variables.

PJW

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Re: Flattening yield curve

Post by hdas » Sat Oct 06, 2018 1:03 pm

Here's what the New York FED public estimates are (only using this variable):

Image

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Re: Flattening yield curve

Post by Kevin M » Sat Oct 06, 2018 1:56 pm

stlutz wrote:
Thu Oct 04, 2018 6:29 pm
Couldn't see that it's been noted above, but historically the better recession predictor has come from comparing 3 month T-bills vs. the 10 year. The difference between those two today is just shy of 1%, so not even close to being inverted.
FRED only provides 3-month data back to 1982, so we can only look at the 10-3mo for the last three recessions using FRED:

Image

I don't see any consistent superiority of one over the other.

For the recession beginning in 1990, they were both inverted more than a year before the recession started, but the 10-2 did invert a few months before the 10-3mo. Both had turned positive shortly before the recession, with the 10-3mo much more so.

The 10-2 also inverted before the 10-3mo preceding the recession beginning in 2001, and again, both turned positive shortly before the recession started.

They followed a pretty similar pattern preceding the recession that started in late 2007. Both were slightly inverted in Feb 2006, but went positive before both were inverted again by Jul 2006. Both were positive by early June 2007, and while the 10-2 remained positive until the start of the recession in Dec 2007, the 10-3mo inverted briefly again from Jul 20 through Aug 9 2007. The 10-3mo barely inverted again for one day, Aug 27, then both pretty steadily climbed into positive territory in the months just preceding the start of the recession, with the 10-2 at 0.99 and the 10-3mo at 0.83 by the start of the recession.

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Re: Flattening yield curve

Post by stlutz » Sat Oct 06, 2018 5:31 pm

Kevin M wrote:
Sat Oct 06, 2018 1:56 pm

I don't see any consistent superiority of one over the other.
In terms of where I got this notion:

https://www.frbsf.org/economic-research ... ecessions/

And they agree that no one particular measurement has clearly dominated--the 3 mo. vs. 10 yr. spread has just worked a bit better than the alternatives--at least in the past.

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Re: Flattening yield curve

Post by edgeagg » Sat Oct 06, 2018 7:17 pm

Phineas J. Whoopee wrote:
Sat Oct 06, 2018 12:12 pm
Thank you, JoeRetire, for continuing to make the point I made.

If anybody doesn't understand how yield curve changes and recessions can both be effects of yet a third thing, with neither of the first two causing the other, they may want to read this article on confounding variables.

PJW
Thanks. I know about confounds quite well. What I am asking is for your explanation of which one it is. Just saying that there might be a confound doesn't make it so. OTOH there is published research to bear out the other POV.

ProfWengen
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Joined: Sat Oct 06, 2018 9:15 pm

Re: Flattening yield curve

Post by ProfWengen » Sat Oct 06, 2018 10:08 pm

I think it is premature to worry. There can be a pretty big lead time between the time the YC inverts and recession begins, and the US isn't inverted yet.

edgeagg
Posts: 105
Joined: Tue Jan 23, 2018 1:27 pm
Location: WA-US

Re: Flattening yield curve

Post by edgeagg » Sun Oct 07, 2018 8:37 am

ProfWengen wrote:
Sat Oct 06, 2018 10:08 pm
I think it is premature to worry. There can be a pretty big lead time between the time the YC inverts and recession begins, and the US isn't inverted yet.
Yes, correct. The time is between 8 and 17 months. 8 has been the shortest.

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