Thursday, December 10, 2009

Yield Curve, Yield Curve, Yield Curve

As we've touched on several times in the past, the Yield Curve or the difference between the 10 Yr Treasury and the 90 Day is very predictive of future economic growth. A wide difference in yields of 2% of more is usually very conducive to growth while a flat to negative yield curve signals tough times ahead - credit is restricted at those levels.

Bloomberg had an article today about the Yield Curve being the highest since 1992. Now they use the difference between the 30 Yr and the 2 Yr securities, but it's still the same philosophy with different versions of long term versus short term yields.

No matter which version you use, when the Yield Curve is 368 basis points banks are literally printing money by borrowing it for next to nothing and lending it at much higher rates. Just think how your savings account pays next to nothing, but a 30 year mortgage is around 5%. One major problem though is that banks are having a hard time finding qualified borrowers of that cheap cash. As the economy begins to recover that issue will be worked off. Count on the Yield Curve remaining high until those problems are solved though which is one of the major backstops for the economy and market.


  • Treasuries fell, with the gap in yields between 2- and 30-year securities near the widest margin in 17 years, before today’s $13 billion bond auction.
  • The so-called yield curve touched 368 basis points, one basis point below the 369 level it reached in 1992, with the Federal Reserve’s target rate anchored at a record-low range of zero to 0.25 percent and the Treasury extending the average maturity of government debt being sold. The shift to longer- maturity debt has raised concern that investors will demand higher yields to offset the risk of inflation as government spending drives the deficit to a record $1.4 trillion.
  • The “historically wide slope” between 2- and 30-year debt “should help entice investors and arbitrageurs to consider bidding for today’s supply against shorter issues on the curve,” Chris Ahrens, head of interest-rate strategy in Stamford, Connecticut at UBS AG, wrote in a note to clients.

Edit - after the close: Just noticed that the closing Yield Curve jumped to a 29 year high of 373 basis points. This weakness explains why risky assets such as the Russell 2000 stocks have been weak lately. Some flight to quality or large cap stocks is taking place. Oddly though, this yield curve is most bullish for small caps and risky assets. Ideally you buy them when the yield curve is high and sell them when its flat.

  • Treasuries fell, with the gap in yields between 2- and 30-year securities reaching the widest margin since at least 1980, after a $13 billion offering of 30- year bonds drew lower-than-forecast demand.
  • The so-called yield curve touched 373 basis points, the most in at least 29 years, as the bonds drew a yield of 4.52 percent, compared with an average forecast of 4.483 percent in a Bloomberg News survey of five of the Federal Reserve’s 18 primary dealers. The so-called yield curve has widened from 191 basis points at the end of 2008, with the Fed anchoring its target rate at a record-low range of zero to 0.25 percent and the Treasury extending the average maturity of U.S. debt.

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