Yield Curve = Recovery?

[Gearhead Jim]

CNN.com has an article about how the yield curve, once again increasing with maturity, is predicting a recovery.

That's probably true, but couldn't it just as easily be predicting future inflation regardless of a recovery?

Sure, a recovery usually produces rising interest rates. But I seem to recall that stagflation did the same thing 30 years ago.

Comments?

 

[Gone4Good]

While it's true that increased inflation expectations can drive a steepening yield curve, we're also seeing a steepening of the TIPS curve. As you point out, it's not enough to say that the nominal yield curve is steepening, it is a rise in real yields that suggest an improving economic outlook.

The CNN article looks at yields from Jan '09 to today. Over the same time frame the 5-10 TIPS curve went from a negative (inverted) 58bp to a positive 90bp.

Inflation expectations are also rising. The 10-yr TIPS breakeven in January was just 44bp (the 5-yr was inverted, suggesting short-term deflation expectations). Now the 10-yr breakeven 234bp.

So while inflation expectations are up from deflationary views earlier this year, a 2.3% 10 year inflation outlook is something most people would be OK with (Ron Paul excepted, of course) and is not at all suggestive of "stagflation".

 

[ziggy29]

It is somewhat comforting. I've found that the bond market "gets it right" more than the stock market does, and if the bond market prices in a recovery, I tend to believe it more than when the stock market does.

Having said that, at least some of the increase in the differential between short and long interest rates may be increased inflationary expectations years down the road. For example, not too many economists see much inflation over the next year or two, but ultimately all the deficit spending and debt is likely to lead to an uptick in inflation a few years hence. Bond investors in such an environment may be willing to tie up their money for 2% for two years, but not ten or more...

 

[NW-Bound]

All I can say is I love the smell of money on Xmas Eve.

Well, I love money any day of the year. I like to have lots of it, so that it frees my mind so I can feel unhappy about other things.

 

[brewer12345]

All I can say is I love the smell of money on Xmas Eve.

Well, I love money any day of the year. I like to have lots of it, so that it frees my mind so I can feel unhappy about other things.

I've got ninety thousand pounds in my pyjamas.
I've got forty thousand French francs in my fridge.
I've got lots of lovely lire.
Now the Deutschmark's getting dearer,
And my dollar bills would buy the Brooklyn Bridge.

PRESENTER and CHORUS:
There is nothing quite as wonderful as money.
There is nothing quite as beautiful as cash.
Some people say it's folly,
But I'd rather have the lolly.
With money you can make a splash.

PRESENTER:
There is nothing quite as wonderful as money.

CHORUS:
...Money, money, money, money.

PRESENTER:
There is nothing like a newly minted pound.

CHORUS:
...Money, money, money, money.

PRESENTER and CHORUS:
Everyone must hanker
For the butchness of a banker.
It's accountancy that makes the world go 'round.

CHORUS:
'Round, 'round, 'round.

PRESENTER:
You can keep your Marxist ways,
For it's only just a phase,
For it's money, money, money makes the world go 'round.

CHORUS:
...Money, money, money, money, money, money, money, money, moneeeeey!

 

[NW-Bound]

Yeah, that's the spirit!

Now in the modern days, our stash is just numbers, or 0 and 1 bits, in bankers' computers, and we are deprived of the joy of counting it physically like Uncle McScrooge.

I remember as a kid keeping my money in single bills so the stack was thicker.

 

[brewer12345]

Nothing keeping you from cashing out of everything for dollar bills and rolling around naked in a big pile of them...

 

[ziggy29]

Nothing keeping you from cashing out of everything for dollar bills and rolling around naked in a big pile of them...

Except for the suspicion and the potential alerting of the Feds who may start monitoring you as a suspected drug dealer...

 

[NW-Bound]

I have learned to mentally roll around in a pile of 0 and 1 bits.

"You adapt to what you have" - Martha

 

[NW-Bound]

I just checked my portfolio. I am now only 10% down from Oct 07 high, and half of that might be due to withdrawal. Equities up to 72% of total, despite some cash from recent income.

Rebalance now? Nah... I have had equities as high as 80% before. I ain't sellin' until it's time.