The Real Yield Curve

J.D. Swampfox's picture

Rosenberg argues the nominal yield curve would be
inverted right now if it were not for the fact that short term rates are
essentially at  zero.  The Treasury shows the Friday July, 9 nominal yield
curve as:

Date 1 mo 3 mo 6 mo 1 yr 2 yr 3 yr 5 yr 7 yr 10 yr 20 yr 30 yr
07/09/10 0.16 0.16 0.20 0.30 0.63 1.03 1.85 2.52 3.07 3.85 4.04


If we assume that expected inflation for the short term is (say) -3,
that is, that deflation is expected over the short term, but that inflation is expected to rear its ugly head over the long term (say)
+ 3, then we can use Fisher's relation that nominal rates less expected
inflation equals real rates, to see that the REAL yield curve could be
inverted right now:

2 year Short term nominal (.63) - expected deflation (-3.00) = 3.63

30 year Long term nominal (4.04) - inflation (+3.00) = 1.04 real

If the real yield curve is inverted, it's an ominous sign...

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kaiserhoff's picture

Don't know what you are trying to do, but you have your signs wrong.  Nominal rates have to be PLUS inflation, not minus. 

The case can be made that short rates should be negative now, but that would flash too obvious a sign of depression on the way.  Baldy Ben doesn't have guts enough for that, although in theory, it's quite reasonable. 

antidisestablishmentarianismishness's picture

Ok, i guess this means money market accounts are paying 3% right now.  What's the complaint?

Ned Zeppelin's picture

Earnings season, a time for spin and optimism.  BP will get the gusher under control, and that will fade from view, to those who do not confront it on a daily basis.  The band will play on, until the Fall.

Grand Supercycle's picture


As warned about earlier, DOW/SP500 remains bullish for now ...

Sudden Debt's picture

I think it will stay at least 2 week bullish till after earnings. After that we might have another black swan event that crashes everything of some more XTC for the markets.

The next big problems are the heatwaves that are torching Europe right now. This year is one of the worst, and there also seems to be with lower air pressures.

Second because of the heat is the lower crop returns.

traderjoe's picture

I too wonder what the downside catalyst will be. Seems people want to believe in the EU stress tests. What's interesting to me is that the companies actually reporting numbers have tended to go down (fairly substantially). BBY, Bed Bath, CSX, FDX, etc. have all had big down days after earnings, yet "earnings are good". So, don't know which way earnings will swing us. 

Edmon Plume's picture

Def vs Inf has been argued endlessly.  I think we are having both at the same time, in different commodities.

A 10 oz bag of potato chips at a major grocery chain is 75 cents more (on sale) than a gallon of gas.  Unheard of.  Used to get the same bag for $1.50 on sale.  Hadn't been in a grocery store in almost a year, by the way.  Gallon of milk is up.  Eggs are up.  In sum, I'm seeing higher food prices across the board, and it's not just a seasonal commodity trend.  Granted, this is all just subjective speculation, meaning it's about as scientific as the CPI.  Talked to a friend in Cali yesterday, and he's riding his bike to work to save on gas ($3.20/gallon), and he says a gallon of milk in greece part 2 is way high.

Stopped going to restaurants a few months ago, because the prices increased but quality was waaay down -  kept getting the grisley-est steaks I've ever had.  It's like they worked an oxen to death in the field, and then sold off what was left of 'em.

On the other hand, go to newegg and check out what $300 will buy you in an LCD.  Way more value (27" screen, tv tuner built in, LED backlighting, etc), less money.  Go buy any small appliance, or a hammer, or whatever.

In sum, about the only thing the USA produces anymore is food, and servitude.  Food is going up because of domestic cost hikes (IMHO) but the rest of our consumption is largely imported, and with our BFF China, gizmos and garden gnomes have been a bargain.

Again, this is mostly speculation on my part, based on my humble and singular experience.

Nonconformist's picture

Interesting observation.  I've noticed the same thing in my area.  It seems that people would rather not work and live off savings than accept a lower wage or profit margin then they had become accustom to.  At some point though the realization that the economy will not come roaring back will finally sink in.  At that point, with savings dwindling, it will be interesting to see if attitudes start to change.

DoctoRx's picture

The price of bread is increasing.

Yet the value of my home is probably decreasing.

I lose both ways.

Sudden Debt's picture

CONCLUSION: If you would have build a ginger bread house, you wouldn't have any problems.

anarkst's picture

The interesting thing about economics is that hardly anybody talks about it anymore.  People are much more concerned with the manipulation of money then with the relationship between producer/consumer.  It would be like being only concerned with the efficacy of munitions as opposed to the rationale of being at war in the first place.

The Alarmist's picture

Yeah, one of the first things they used to teach you at B-School was that it was all about the free and fair exchange of goods for value.  Since that has pretty much gone by the wayside, what is the point about worrying about economic theory?  Besides, conspiracy theories are far more interesting than trade indifference curves or supply/demand equilibrium discussions.

Vampyroteuthis infernalis's picture

Intersting analysis. The only problem is we know that deflation is occuring. When will inflation appear in the future and at what rate?

ChanceIs's picture

You raise a valid point WRT longer term yields vice inflation.  However you must admit that absent Bernanke drowning the short end by sitting about 100 Chinook helicopters on it, near rates would be much higher.


Regardless, the curve is in reality much less steep - perhaps flat or negative - than the nominal appears to the naked eye.  It defies quantitative analysis - but then what doesn't since Bernanke and Geithner have been pulling the levers.

Rogerwilco's picture

Yeah, if you accept the standard definition of deflation, reduced availability of money and credit, then we are definitely not seeing any inflation. Some prices are rising due to shortages, and this lets folks who use the price definition claim there is inflation.