Yield Curve Inverts

[FREE866]

So let me get this straight, you "know" how banks work and you think banks still write mortgages?

So banks aren't involved in mortgage lending? Where are you borrowing from?
The spread ( yield curve) is the difference between long-term and short-term rates, which also serves as a proxy for loan profitability for banks. Banks' core business is to borrow short (e.g., deposit accounts) to fund longer-term loans (e.g., mortgages, car loans, etc.), so the more long-term rates exceed short, the more money the bank would make. Hence, a positive spread would likely encourage banks to lend to capture the profit, and more plentiful capital stimulates economic growth. That's what we have here.

It's really not that difficult guys. If you look at all my statements on this thread they are pretty consistent and accurate. Don't know what else to say.

and to my original point:
The importance of the yield curve to future growth is why The Conference Board's forward-looking Leading Economic Index (LEI) uses the interest rate spread of 10-year Treasurys less federal funds-it provides a telling sign about the upcoming economic environment.

 

[target2019]

Help me find the current inversion:

To answer your question directly, the inversion is the period of time when the signal has gone below the bold 0 horizontal axis.

 

[clifp]

Seriously? It's like .01 inverted. Cats and dogs living together.

I checked today's WSJ the 2 and 5-year treasury were both at 2.832. Other than psychologically your are correct the .01 isn't significant.

But the bigger point is in a "normal" interest rate environment, there should be a measurable difference between lending money for 2 years, 5 years and 10 years. That's not true today and causes unusual behavior.

As I posted for a bunch of reasons I'm reducing my equity position from basically fully invested 90/5/5 to a more typical 75-80% equities. The number one driver is short-term rates, Now 3% return isn't very exciting but 3% for 2 years is respectable return with inflation under control.


If a million other people decide to act like me you can expect a decline or least a sideways stock market.

 

[DrRoy]

With yield curve slope they are generally looking at the 10 year versus the 2 year. Although the yields are very close, that part of the curve has not yet inverted. With yields super close it makes more sense to describe it as flat anyway.

+1

 

[footenote]

Update:
"U.S. Treasuries rose after a segment of the yield curve inverted for the first time in more than a decade, as investors doubt how much longer the Federal Reserve will keep raising interest rates.

"Officials from the central bank have begun to strike a more dovish tone, leading traders to pare bets on the pace of hikes and push down the dollar on Tuesday. The yield spread between three- and five-year yields turned negative for the first time since 2007 and could be a sign that the gap between two- and 10-year bonds will shortly follow, according to Mizuho International Plc.

...

"The spread between two- and 10-year rates, which has narrowed to the flattest since 2007 at 14 basis points, is more closely watched as a potential indicator of pending recessions. Curve flattening over the past two years has signaled investors’ concern that rising rates against a backdrop of slowing global growth could harm the U.S. economy."

Full article: https://www.bloomberg.com/news/arti...cial&utm_source=twitter&utm_content=australia

 

[COcheesehead]

Who is buying the long end to keep those yields down? I’d like to know. I buy a lot of individual bonds. I shake my head at anything over 4 or 5 years. It’s just not worth the duration risk.

 

[MichaelB]

Who is buying the long end to keep those yields down? I’d like to know. I buy a lot of individual bonds. I shake my head at anything over 4 or 5 years. It’s just not worth the duration risk.

Pension funds and insurance companies?

 

[footenote]

Pension funds and insurance companies?

Right! Long-duration outputs gonna need long-duration inputs.

 

[MichaelB]

From what I have read, the gradual unwind is serving to push up 10+ year rates relative to what they would have been otherwise. That means that maybe we would have been 2-10 inverted by now if that were not going on. Or perhaps that is not the case and we are getting a true reading from the yield curve as it exists today. An exercise for the reader...

In addition, the US Treasury has been (reportedly) shortening the duration of new debt, which probably adds to this.

 

[pb4uski]

So banks aren't involved in mortgage lending? Where are you borrowing from? ....

I don't need to borrow anymore... haven't for quite a while... I'm a lender, not a borrower.... but that is beside the point.

Banks are originating mortgages, but they don't retain them... as brewer points out as soon as the ink is dry they are out the door... in effect they do the underwriting in exchange for a commission... and then service the loans for servicing fees.... but they rarely keep mortgage loans.

 

[audreyh1]

In addition, the US Treasury has been (reportedly) shortening the duration of new debt, which probably adds to this.

Have they? I know they recently introduced a 2 month bill. Seems like they would take advantage of the low interest rate spread of long term rates.

 

[COcheesehead]

Pension funds and insurance companies?

Scary.

 

[brewer12345]

So banks aren't involved in mortgage lending? Where are you borrowing from?
The spread ( yield curve) is the difference between long-term and short-term rates, which also serves as a proxy for loan profitability for banks. Banks' core business is to borrow short (e.g., deposit accounts) to fund longer-term loans (e.g., mortgages, car loans, etc.), so the more long-term rates exceed short, the more money the bank would make. Hence, a positive spread would likely encourage banks to lend to capture the profit, and more plentiful capital stimulates economic growth. That's what we have here.

It's really not that difficult guys. If you look at all my statements on this thread they are pretty consistent and accurate. Don't know what else to say.

and to my original point:
The importance of the yield curve to future growth is why The Conference Board's forward-looking Leading Economic Index (LEI) uses the interest rate spread of 10-year Treasurys less federal funds-it provides a telling sign about the upcoming economic environment.

Find me 3 banks.with at least 50 billion in assets that have half their balance sheets in 15 and 30 year fixed rate mortgages. Take your time, I am only 45.

 

[audreyh1]

Who is buying the long end to keep those yields down? I’d like to know. I buy a lot of individual bonds. I shake my head at anything over 4 or 5 years. It’s just not worth the duration risk.

I believe the downward pressure on long treasury rates has been due to overall low global long-term rates, reflecting global economic conditions. European and Japanese long term rates are quite low, so American long-term rates are very attractive to foreign buyers.

 

[audreyh1]

So banks aren't involved in mortgage lending? Where are you borrowing from?
The spread ( yield curve) is the difference between long-term and short-term rates, which also serves as a proxy for loan profitability for banks. Banks' core business is to borrow short (e.g., deposit accounts) to fund longer-term loans (e.g., mortgages, car loans, etc.), so the more long-term rates exceed short, the more money the bank would make. Hence, a positive spread would likely encourage banks to lend to capture the profit, and more plentiful capital stimulates economic growth. That's what we have here.

It's really not that difficult guys. If you look at all my statements on this thread they are pretty consistent and accurate. Don't know what else to say.

and to my original point:
The importance of the yield curve to future growth is why The Conference Board's forward-looking Leading Economic Index (LEI) uses the interest rate spread of 10-year Treasurys less federal funds-it provides a telling sign about the upcoming economic environment.

Seems like you are deliberately ignoring the explanations that banks originate mortgages but don’t generally keep them.

 

[brewer12345]

I believe the downward pressure on long treasury rates has been due to overall low global long-term rates, reflecting global economic conditions. European and Japanese long term rates are quite low, so American long-term rates are very attractive to foreign buyers.

I think this is definitely a major driver at the long end.

 

[alaska55]

Seems like you are deliberately ignoring the explanations that banks originate mortgages but don’t generally keep them.

They cherry pick the ones they want to keep, but they still carry quite a bit $ wise. The last 2 mortgages i carried(payed off in 2012&13) was with Wells Fargo and PNC and they kept the loans.

 

[FREE866]

Find me 3 banks.with at least 50 billion in assets that have half their balance sheets in 15 and 30 year fixed rate mortgages. Take your time, I am only 45.

I never claimed that
I said the key spread to look at is the fed funds vs the 10 year rate and the The Conference Board's forward-looking Leading Economic Index (LEI) uses the interest rate spread of 10-year Treasurys less federal funds-it provides a telling sign about the upcoming economic environment. That was the whole point in my original post!

 

[njhowie]

Who is buying the long end to keep those yields down? I’d like to know. I buy a lot of individual bonds. I shake my head at anything over 4 or 5 years.

I too buy lots of individual bonds and CDs and as difficult as it is to do, I am always nibbling something out at 10, 15 or even 20 years.

We do not know what will happen to interest rates with any degree of certainty beyond maybe 6 to 12 months. We have no idea how long term rates will move at all. There are many scenarios which can occur to bring on higher long term rates or lower long term rates.

Beyond myself and the pension and insurance companies which MichaelB correctly points to, you have the rest of the world buying US long term debt. Remember, parts of the world are still at 0.0% (or less) and as messed up as things are in the US, we still have an excellent credit rating and our debt is highly desired. So, there is no lack of demand for the debt and long term rates will be held down by global demand. With economic, financial, and geopolitical concerns going forward, investors have reason to be concerned and some are very happy with the safety long term bonds can provide.

It’s just not worth the duration risk.

If you are planning to hold until maturity, "duration risk" only means that your annual rate of return might not be as high over the holding period as if you were to invest when rates are higher. It has nothing to do with losing money, just possibly not earning as much. However, you have no guarantee that rates will go higher, or if they do go higher, how high they go, or how long it will take to get to those higher rates.

The risk you take in positioning an entire portfolio with a maximum of 4 or 5 years, is that rates head lower, possibly much lower, and you are able to reinvest only at lower rates when your stuff matures. Are your bond holdings simply mimicking a money market fund or short-term bond fund? If so, it's going to perform similarly to them if rates go lower.

Folks are always preaching about the taboos of timing the market when it comes to investing in the stock market, and yet we have a whole bunch who are doing just the same with interest rates.

I don't fault anyone who chooses to invest as they do if they are comfortable with it and understand the risks being taken.

 

[brewer12345]

I never claimed that
I said the key spread to look at is the fed funds vs the 10 year rate and the The Conference Board's forward-looking Leading Economic Index (LEI) uses the interest rate spread of 10-year Treasurys less federal funds-it provides a telling sign about the upcoming economic environment. That was the whole point in my original post!

No, you swore up and down that banks borrow Fed funds and short term deposits and bought long term business loans and mortgages. Patently untrue.

As for your mortgages, if they were fixed rate those banks very likely sold the loan and retained the servicing rights.

 

[FREE866]

No, you swore up and down that banks borrow Fed funds and short term deposits and bought long term business loans and mortgages. Patently untrue.

As for your mortgages, if they were fixed rate those banks very likely sold the loan and retained the servicing rights.

Wow....I've tried putting this in my own words and you still don't get it so I guess it's time to give you a reading assignment

again, it's not complicated....

https://www.thebalance.com/what-are-federal-reserve-funds-how-the-funds-market-works-3305841

and although this article is dated the main points about banks profitability are discussed

https://www.fisherinvestments.com/en-us/marketminder/mending-lending

"Banks make money on the spread—the difference between short and long-term interest rates. Banks borrow short term (checking and savings accounts) and lend long-term (mortgages, business loans). The difference between those two is banks’ core business, loan revenue. "

 

[MichaelB]

Not pointing to anyone in particular, but we would all appreciate keeping the snarky tones out of the discussion.

 

[FREE866]

Not pointing to anyone in particular, but we would all appreciate keeping the snarky tones out of the discussion.

fair point
i apologize

 

[alaska55]

No, you swore up and down that banks borrow Fed funds and short term deposits and bought long term business loans and mortgages. Patently untrue.

As for your mortgages, if they were fixed rate those banks very likely sold the loan and retained the servicing rights.

Wrong again. So you know more about my mortgages than I do. You can't read either. That was Alaska55 who posted about the mortgage not FREE866

 

[brewer12345]

Wrong again. So you know more about my mortgages than I do. You can't read either. That was Alaska55 who posted about the mortgage not FREE866

So it was. The perils of reading the forum on a phone screen.