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Is the Treasury Market Signaling Recovery?
A lot has been written about the yield curve lately. Some are saying Treasuries are dropping only because of the increase in federal spending while others are saying we're simply going through a standard correction. In fact, both are correct as the undercurrents of both issues are present in the Treasury marker's recent action. But what has also been missed is the possibility that the Treasury market could also be signaling an economic recovery.
First, let's start with a bit of history. Here is a chart of the IEFs -- an ETF that tracks the 7-10 year area of the Treasury market:
This market -- the middle part of the Treasury curve -- has been in a rally since the middle of 2007. The reason is simple: this is when the problems started in our financial system. During times of stress, investors seek safety and there is nothing safer than a US Treasury bond. However, this market has started to sell-off lately. In fact, you can trace the beginnings of the recent Treasury market sell-off to early March. This is when the stock market started to rally, indicating that part of the Treasury market sell-off is in fact a reallocation of assets from less risky (Treasury) to more risky (equities).
In addition, there has also been several rallies in other more risky parts of the bond market that also indicate investors are shifting their assets into riskier bonds. For example, here is a chart LQD which tracks investment grade corporate bonds:
Notice it started to rally when the stock market did (early March). Also notice this is when the Treasury market started to sell-off. In addition, here is a chart of the junk bond market:
which shows the exact same pattern -- a rally that started with the recent equities rally and the Treasury market sell-off.
There has also been a fair amount of writing about the yield curve differential -- the difference between the 10 and 2 year Treasury bonds. Here is a chart from Calculated Risk of that difference:
Notice the last two times the difference was this high the economy was already in recovery. The reason is simple. In both situations the Fed was still cutting short-term interest rates widening the yield curve well into the expansion. Here is a chart of the effective federal funds rate starting in 1990:
Notice in both the early 1990s and the early 2000s the Federal Reserve was cutting rates well into the expansion as a way to power the economy forward. In other words, the yield curve widened because the Fed was still in a very stimulative posture. The same is true of the current Fed -- they have lowered interest rates to essentially 0% after adjusting for inflation.
So -- let's sum up so far:
1.) The longer part of the Treasury curve is selling off. BUT
2.) Other riskier assets like higher-grade corporate bonds, junk bonds and equities are rising indicating we are also seeing a reallocation of assets into riskier assets. In addition,
3.) The yield is steepening because the longer part of the curve is selling off while the shorter part of the curve is still stimulative. This is exactly what happened in the early parts of the previous two expansions.
Now let's address the final point: is the increase in federal spending and the commensurate increase in the issuance of federal securities also a reason for the sell-off in the longer part of the yield curve? It has to be a factor. In the bond world that means an increase in yields. An increase in supply = lower prices. That is simple supply and demand. However -- is this fatal? Hardly. Here is a long-term chart of the 10 year Treasury yields:
Notice we are at the tail end of a multi-decade bull market in bonds. Notice that interest rates have been dropping for the better part of 30 years. Also note that we had much higher interest rates in the 1980s -- rates between 7.5% and 10% -- and the economy still grew. In other words, for anybody to complain about interest rates rising to 5% and acting as though that were a sign of the end of the world -- it's simply a ridiculous claim.
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President Obama and the Democratic Congress are hitting us with a level of indebtedness and government Shock and Awe control that will soon catch up with them. They are spending this kind of money on a stimulus that helps only UAW workers and fat cat connected Wall Streeters. No real jobs are being created from all this. Anyone who gets away from the beltway and talks to small business owners and average Americans knows that disillusionment is setting in and rapidly morphing into hostile opposition.
http://www.bloomberg.com/apps/news?pid=20601109&sid=a_YnClfaKdqs
An interesting article from Bloomberg, that Huffpo might want to consider linking to, for their readers. To access the chart, click on the graphics icon at the top of the article.
From the article: "Indications that the housing market has stabilized look like “the mother of all head fakes,” Whitney Tilson and Glenn Tongue, co-founders of T2 and co-authors of the book “More Mortgage Meltdown,” wrote in a June 2 report. ".
For the record, I hope you're correct.
Can anyone remember the last time a US Secretary of the Treasury went abroad to a major bond holding government, and was scolded (note: one could read that into it)?
Or when a US Secretary of the Treasury addressed a university in a foreign country, that also happened to be a major bond holder, to where the audience laughed at him?
The confidence doesn't sound like it's all there, if you know what I mean. And that's something we haven't faced in the last 30 years.
Why would a Treasury Secretary go to a Bilderberg meeting while in office?
Some of the members have long promoted a "one World Government".
The economy has entered a deflationary depression because the credit markets are broken. Has anything meaningful been done to fix these markets? The simple answer is no. Just ask any average American trying to obtain a mortgage or a car loan. The book How America Can Escape the New Great Depression details what has gone wrong and what it will take to fix it.
NO one SHOULD believe the worst is over because of talk of greenshoots, or the bear market rally. In the spring of 1931 people believed the worst was over and more shoes dropped. There are plenty more shoes to drop worldwide before this cirsis is over.
http://www.escapethenewgreatdepression.com
"Notice we are at the tail end of a multi-decade bear market in bonds."
Bonddad needs to fix the sentence above. It should read that "we are at the tail end of a multi-decade BULL market in bonds." Lower yields means higher prices/values. So bond holders over the past few decades have seen the prices/values of their bonds continually increase to a point where they made substantially more than the head line yield if they sold before maturity.
Also, there is a third reason treasury yields are going up-- quantitative easing. The Fed is printing more dollars and this makes all dollars worth less. This makes treasuries much less attractive for foreign buyers, who see the value of their US treasuries decrease relative to assets in own currency, plus it makes foreign assets and real assets like commodities more attractive to US investors, who then sell their US treasuries and buy those foreign assets and commodities.
The government is manipulating the interest rate. It's not 5%, it's 12%. Investors are dumping long term bonds because they aren't as low risk as they used be because the US is printing money. The only way to make money with that high of an interest rate is with riskier investments, so dah, we are seeing a rally in junk bonds again. Bernacke and Geithner are going to have to clean up their act or the stock market is going to crash again.
I don't understand the comment about the interest rate being 12% and not 5%. About junk bond prices, they will go back down the toilet if the economic recovery doesn't come to fruition, or if there's a recovery that fizzles out. This will happen regardless of how much money the Fed prints.
Interest rates limbing to 5% means China and others are beginning to abandon the dollar. The snowball is now rolling downhill and could quickly turn into an avalanche of money fleeing Geithner's Ponzi Paper Products.
But ... nothing to see here folks, move along move along
When a nation of a billion people enters every market with half price goods, there will be some kind of effect. Still, our problems are our problems and foreigners are peripheral. Our problems will be solved here in America or not at all.
I do not believe there is any recovery here. Short term it may look good, but the long term is going to show up some serious problems. Inflation is being encouraged by the US government which will lead to a disaster the likes of which the US has not seen for a long time or perhaps never before. The way things are, the US has to encourage inflation as that is the only way to stay out of the tar pits for the moment. But they know and I know that it is not going to wash within a 10 year period. Basically the treasury has no treasure. They are at best a brokerage house. As such they are very susceptible to the political climate around the world and especially to the whims of China. This country is in extremely deep doodoo and it does not take a rocket scientist to figure that out. What most people do not understand is that the problem has not been solved. What has happened is that the government has applied certain measures to mitigate the speed of the descent but that is all. It is not going to be a parachute landing. I like your analysis so keep up the good work but I don't know if I agree with some of your conclusions. We will find out sooner or later won't we?
Inflation seems to absorb deficits over a three - four year period. Of course, the inflation is on going and compounds. My argument has been that depressing wages depresses the prices of what wages mostly buy and the inflation has been squeezed into the things that wealthy people buy. The stagnation in the stock market is due to a drop in foreign support but our internal inflation tends to sustain stocks even as profits (squeezed at the worker market) fail to support them.
Full employment and higher wages would make a more sustainable economy without having to shoot all the wealthy people or confiscate their estates. I don't really see how we get there from here, but I don'[t believe in revolution. That's just chaos and a change of personnel as the pre existing order is restored.
Inflation will absorb deficits if the inflation is demand driven, which it isn't and won't be. About the stock market, global markets have mimicked the US market for the past year for the most part, although markets of commodity producing companies have been out-performing for the past month. I don't think the US market has lagged because recently because of a lack of foreign buyers, as much as a move of US mutual and hedge funds back into emerging market stocks recently.
The Congressman below gave an interesting speech in 1993 that really makes one believe we have already stepped over the precipice. I would be interested in hearing any comments on what he said.
The full speech is short and to the point and available at the link below.
http://whatreallyhappened.com/WRHARTICLES/ARTICLE2/doodoo.html?q=ARTICLE2/doodoo.html
United States Congressional Record - March 17, 1993 - Vol. #33, page H-1303 - Speaker- Rep. James Traficant, Jr. (Ohio) addressing the House:
The treasury markets are signalling a return of inflation brought on by the brain dead policies of our political leaders.
Our problem was that people were borrowing and spending too much and the cure is not creating trillions of dollars out of thin air as the our government has done.
If the problem is not enough savings the cure cannot be hammering savers.
Before getting all excited about a recovery, a good look at this chart comparing market activity between 2007 and 1929 might help http://econocasts.blogspot.com/2009/06/synch-or-sink.html.
The current unpleasantness will be prolonged simply because the US economy lacks exports to balance its current account.
In economics and nature, growth curves of all types are sigmoid, and we are close to the far right asymptote as far as growth of US foreign debt replacing exports in the current account calculus.
"How In other words, for anybody to complain about interest rates rising to 5% and acting as though that were a sign of the end of the world -- it's simply a ridiculous claim."
I have no qualms regarding calls for Recovery. True or not, they actually grease the wheels of recovery. At a minimum, they move the national discussion from hysteria to calmer discourse.
Liquidity is great. How often in history could The Banks borrow money for pennies and sell it for 5%? Risk acceptance grows. When is history have the 10 yr yield and the stock market BOTH been raging up at the same time? I could not think of a better situation for the asset class.
Of course, the government/Fed is using cheap money for the lower end of the Treasury paper equation and debt sales for the high end. Also, I commend them for creating a virtual arbitrage for The Banks to recover.
Remember cheap money, national debt, and a "jobless recovery"? Am I talking to the same people ,i wrote with for years? Ironically, I can't see anyway other than for the government to spend, but didn't we all say the "bill will come due"?
It has, but we're not paying it yet again. The New Greenspan/BushCo Recovery Plan. U3 unemployment will be nominally massive, and they will have to rent a state to hide the U6 unemployed.
But junk bonds will be a good investment.
Yea.
Yep, that will do it.
A little sarcasm there. Keynes was critical of savings during a downturn. Declining to spend reduces the velocity of money, effectively reducing the amount, and aggravates the problem. Therefore, the government, by deficit spending, satisfies its need by raising the effective amount of money.
Some people think of thrift and credit as moral issues and feel these must come to unhappiness as God frowns upon it. Therefore, a recession is the punishment for the sins of the most people (not you and me, just the people who suffer for it). These suppose the cure is to protect us while making sure others suffer to the utmost. "Liquidate" everybody said Mellon and let the better people emerge to bring on the recovery.
This is ignorant. God gave folk a mind to reason and problems to exercise reason. Heartlessness is not one of the major virtues.
The appetite for risk, at the retail level, has been greatly influenced by the media. Indeed a slowing of the precipitous decline has occurred and must occur before an upturn can commence. That’s where we are now. Now it appears that you’ve joined the cheerleaders at CNBC in calling a bottom. That’s some pretty dubious company and hardly a ringing endorsement based on their track record. I believe that you (or B.R. at the Big Picture) pointed out that the rise in confidence was based on political feelings rather than fundamental economic merits. You might want to put these data into that perspective. I’m still neutral to bearish and think the jury is still out. While the bleeding may have stopped, the patient is still on life support.
1.) CNBC is not the only person/group forecasting recovery. In fact, the general consensus is we'll see growth start again in late 2009/early 2010. We've got the Fed pumping as much money into the economy as possible and we haven't even seen the stimulus package hit the economy yet.
2.) The general sentiment is getting better both politically and economically. Go to Pollster.com.
3.) Right now the numbers are signaling that things are getting better. That obviously could change and I will revise my opinion if that happens. But right now we're getting more and more numbers indicating the worst is over.
For example last week we had some good numbers: Challenger job cut report has been decreasing since the beginning of the year; pending home sales up 6.7%, initial unemployment claims appear to have topped out. The ISM non-manufacturing index is getting better (although it is still showing readings in contraction territory the numbers are improving and have been since October), durable goods orders were up and are now up three of the last four months. Can all that change? Sure. But it's not just one number we're seeing; there are multiple data points out there that are signaling we've put in a bottom.
Now -- I think I've been pretty clear that i think the recovery will be one of slow growth and high unemployment. See the article I wrote on May 30 titled, What Will Economic recovery Look Like?
We agree on the basics, the Fed is printing money, people feel better and the numbers are better now than six months ago.
“We've got the Fed pumping as much money into the economy as possible”
As I have posted, never underestimate the power of the presses.
“The general sentiment is getting better both politically and economically.”
the rise in confidence was based on political feelings rather than fundamental economic merits.
“we're getting more and more numbers indicating the worst is over.”
Indeed a slowing of the precipitous decline has occurred
However,
“the general consensus is we'll see growth start again in late 2009/early 2010”
The general consensus (not including you) at this time last year was everything was contained and there was no recession.
But,
“the recovery will be one of slow growth and high unemployment.”
One man’s U is another man’s L. The term growth recession comes to mind. Not much to look forward to but as W.C. Fields suggested for his epitaph “All things considered I’d rather be in Philadelphia”.
And yes, I have been bottom fishing with some success so far.
And no, I do not trust the Government’s numbers. If they would lie about committing an act of War causing thousands of deaths then what’s the big deal about fudging the numbers on GDP, unemployment and inflation?
Thanks for your posts, data and insight.
As part of habit, I didn't miss "What Will Economic Recovery Look Like". So I can add that money supply velocity is in the range of the post '87 burp, and pretty much the entire stagflation '70s. But I don't know if we can add that as a plus or minus for a "recovery".
Which brings us to the necessity for a definition of "recovery".
If we look where we are, and we are going to be here for a long time, is that a recovery?
The discussion of the treasury market is well taken. But let's keep in mind that unsustainable government forces are unprecedentedly active in that Market. How long can the Fed push down on a long-term lower yield with the dual-schemed quantitative easing? How long can it lend at 0+%? Even Bernanke commented on the debt/deficit, and that assumes he can perfectly sterilize his unprecedented moves. And people eventually get a distaste for markets they feel are not operating under market forces.
My point is that we have used artificial means to sweep our problems, the disappeared value, under the most massive carpet of all times.
The question is when do you "undo" the means, and what happens then?
Remember the wage and price freeze of the '70s.
Remember 1937.
Remember the one historic consistency of all similar economic events...
We always thought we were smarter and more sophisticated than our predecessors..
And we always weren't.
The only signs of recovery are in the credit and equity markets. Seeing a drop in weekly initial unemployment claims from 650k to 600k is not a sign of recovery. Regarding durable orders, most of that is seasonal, but we're also so far off the lows that we'd need to see very sizable increases for about three months to see a real sign of recovery. I believe we could see another leg down in the next year as airplane orders and machinery orders dry up. Higher oil prices will help durable goods orders, however, although that means less buying power for US consumers.
About sentiment, I think Olephart is right. A lot of this is being driven by the media and the stock market. This is one reason the stock market is a leading indicator. It certainly helps that the Treasury Secretary and Fed chairman aren't in front of congress every day asking for emergency money and telling the American people we're in the midst of financial armageddon every day, isn't it? Like I said before, a lot of people think there's a recovery only because of the stock market (which has reacted to the credit market and financial companies for the most part). This is just like how people lost all confidence last fall when the stock market was collapsing.
Bonddad. Forecasting a recovery on the past performance of the bond market is a precarious activity if your assumptions don't hold up. If you assume that this "recession" is akin to all the recessions of the past 30 years, then all is rational in expecting a "recovery" or growth in the economy.
My friend, Bonddad. We are not in the depths of a recession. We are in the deadly embrace of an unprecedented depression in size and danger. Charts are not predictive except as they apply with caveats to other disastrous depressions. Go back to 1929 and 3x its seriousness, also taking into acccount the infusion of trillions into the pockets of banking fraudsters, and of course our bankrupt economy and financial system---both public and private.
>Notice we are at the tail end of a multi-decade bear market in bonds.
You probably meant a multi-decade *bull market* in bonds, since yields move inversely to bond price.
econocasts.blogspot.com
Well Hal, the futures speculators are moving back into deregulated and heavily manipulated commodities markets pulling their money out of treasuries and inflating the price of oil despite the unprecedented worldwide demand destruction (try checking the Baltic Dry Index Hal). The 'green shoots' are the daisy's sprouting on hard working Americans economic graves whose lives have been ravaged by deception and deregulation ala Friedmanite theories dominating US government "policy". Nice try Hal... I was bantering with you on dkos sometime ago that things were going to get worse and I happened to be spot on long before August of last year. Geesh, it pays off NOT to be an "expert"
The Baltic Dry Index has been rising since early January.
In August of last year I wrote the following articles:
Yes it's a recession, no it won't end soon.
The Financial Sector is Still in Deep Trouble
In other words, I was pretty bearish in August of last year.
I was bearish too because Bush was still in office.
Speculation is never the cause of things going up in price. Speculation is always the result of some other factor that causes those things to increase in price. In the case of oil, it's going up because of policies of the Federal Reserve and the US government. If we're in a bear market for bonds and everybody is selling, where else does money go, especially when the dollar is decreasing in value?
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