Is The Fed Panicking: Yield Curve Tumbles To Fresh 11-Year Lows

Despite the stock market's Amazon-bounce gains, US Treasury yields are lower and the yield curve flatter once again - tumbling to its flattest since Oct 2007.

Deja vu all over again...

10Y Yields are holding below 2.80%...


And the yield curve has crashed to fresh flats not seen since Oct 2007...


The entire curve is rolling over...

As a reminder, Bloomberg notes that according to the minutes of the Federal Open Market Committee’s Jan. 30-31 meeting, the most recent for which minutes are available, showed that some policy makers thought it important “to monitor the effects of policy firming on the slope of the yield curve,” noting the strong association between curve inversions and recessions.

Which confirms what The San Francisco Fed warned...  about the flattening of the yield curve...

"[it] is a strikingly accurate predictor of future economic activity.

Every U.S. recession in the past 60 years was preceded by a negative term spread, that is, an inverted yield curve.

Furthermore, a negative term spread was always followed by an economic slowdown and, except for one time, by a recession."

Furthermore, as the two Fed authors explain below, the recent decline in the Treasury curve is sending recession probabilities notably higher.


Harry Lightning Captain Nemo d… Wed, 03/28/2018 - 12:52 Permalink

There are going to be a lot of losers from this flattening trade. Until the stock market takes a dive in earnest, which is now delayed for a year due to the influx of trillions in offshore retained earnings that will be invested in  company buybacks, the bond market is going to struggle to find capital as the government adds another trillion to the already too large debt. At some point, and that point is coming soon, bond yields will have to explode higher to attract the amount of capital the government needs to borrow this year. That bond sell off will be exacerbated by the selling of all those who thought the curve flattening trade was the trade of the year, as the curve steepens and squeezes the life out of everyone who had the flattener on book.

I truly am amazed how this flattener trade has become popular in light of an economy that is growing nearly three percent per year, a government that has to borrow a trillion in new money, and a stock market still hovering near all-time highs. Those are not the conditions under which a flattening trade works, its only the greater fool theory and the herd mentality that drives markets nowadays that is allowing this trade to prosper so far. One day everyone will wake up and the long end will be getting buried, the curve will be steepening, and everyone who put this trade on will get that sinking feeling in their guts that this was their career trade in the worst of ways.

To answer the question, no, the Fed is not panicking. But the risk managers at the prime brokers whose clients are putting this trade in portfolio will be soon, once long end yields start thrusting higher. The margin on the 2s 30s spread probably will go out to 50 basis points at that point ! Actually, that's probably what will turn the flattening trade around, when the prime brokers start charging a lot more margin for their hedge fund clients to put a flattener on. Same thing happens in the commodity markets, they raise the margins and the trend changes.

In reply to by Captain Nemo d…

Harry Lightning lester1 Wed, 03/28/2018 - 17:12 Permalink

That is an excellent point...that is probably why the Fed has been so unwilling to allow their records to be audited, because it would prove that the have manipulated the price of securities through their interventions or interventions that tehy order select broker-dealers to make on their behalf. 

And of course, if the Federal Reserve is allowed to manipulate the prices of securities, how then could it be illegal for individuals or other entities to do the same ? 

Oh its a sordid web of such deceit. 

In reply to by lester1

Honest Sam Captain Nemo d… Wed, 03/28/2018 - 14:20 Permalink

The Writer. 

The FED is incapable, genetically, of panic since they are the closest thing to a god in all of creation. They effectively run the globe as puppets of the 1/10 of 1%.

The moves by the FED are a conspiratorial amalgamation of a coinkadink of interests, comprised of Oligarchs who are telling the FED what to do AFTER the Oligarchs have positioned themselves to benefit from the contrivances they want implemented.

Only a fool thinks the FED panics, gets a worry line in their forehead, a tic, or anything but eternal happiness, no matter what its moves are.


In reply to by Captain Nemo d…

buzzsaw99 Wed, 03/28/2018 - 12:42 Permalink

yeah well the ffr doesn't mean jack shit.  the bernank taught us all a valuable lesson.  better to get 2.8% for ten years than 5.25% for six months.  bitchez.

buzzsaw99 BigWillyStyle887 Wed, 03/28/2018 - 12:57 Permalink

Nope, haven't sold.  My call is still < 1% yield on the 10Y but I don't remember saying zero.  There are other factors at work for me.  I could have sold back when it was around 1.4% but there was nowhere to go.  In hindsight I could have moved to a mm and waited for rates to go higher for a better entry but I've been burned doing that (as mentioned earlier, by the bernank).  I may just wait until it's time to cash out and give up my goal of ever finding a decent stock market entry point.

In reply to by BigWillyStyle887