The flattening yield curve has some worried about a recession

On the one hand, the answer is yes, absolutely. On the other hand, the answer is maybe not. And on the third hand once you had a chance to really consider what in the second hand the answer is yes. Probably. But maybe not for a while.In short, it complicated.Let look into the first hand. It accepted wisdom that an inverted yield curve precedes a recession, because it pretty much always has before. It not magic, either, just simple market mechanics. When the curve flattens or inverts, it because cheap moncler jackets the market expects the economy to turn down and central banks to ease rates, stimulating banks, which lend long and borrow short, to make loans. In anticipation of that, investors get out of short duration bonds and into long bonds, effectively locking in higher yields. As a result, long yields decline, while selling action on short duration bonds pushes up their yields. Presto, change o the curve inverts. Recession ensues.It textbook. recession has hit, on average, in about a year and a half. (It largely the same story for Canada, except for the 2001 dot com recession, from which we were blissfully immune.) It no wonder, Moncler Outlet then, that the yield curve is so revered as a signal. It Chanel black dress of economic indicators, as the Financial Times’Robin Wigglesworth wrote recently.What has market watchers worried is that the moncler outlet sale curve has been tilting down. The yield spread between 10 year and two year Treasuries on July 9 sat at a mere 29 basis points, off by more than 250 basis points from its post moncler sale outlet recession high, in 2011. The spread now is the tightest it been since August 2007, just a few months before the Great Recession began. At the time, that low spread represented a recovery of sorts: it had wavered in negative territory through the second half of 2006 and the early part of 2007.Now, add in the fact that negative short/long spreads have almost always been negatively correlated with the federal funds rate that is, spreads go down as the Federal Reserve hikes, raising short rates and moncler sale you can see why worry is growing. The Fed has already raised seven times moncler outlet store since December 2015, and expectations are high that it will do it twice more this year, raising the possibility that it will overshoot and tilt the economy into recession. cheap moncler sale In short, things are beginning to look like 2005 2007 all over again.Except and here the second hand things don look that way at all in some important ways, at least according to those who doubt the yield curve power of prediction this time around. Among them is Bank of Canada governor Stephen Poloz, who this week (just after raising the overnight rate by another 25 basis points) cheap moncler coats said that he doesn the flattening of the yield curve as a warning sign, and put it down to an huge demand for long dated bonds from insurance companies and pension funds and the like.Surely, Poloz is not wrong in the second cheap moncler observation. Demand for long bonds has grown thanks to soaring demand from pension funds which themselves grew in assets by more than 13 per cent last year, according to a recent Willis Towers Watson survey; they are kind of captive long duration debt buyers, since they are looking to cover very long duration liabilities. Meanwhile, supply, thanks to years and years of moncler outlet online bond buying through quantitative easing, is limited. has begun a QE unwind, the Fed along with the European Central Bank and the Bank of Japan still hold trillions out of the market.So maybe expectations of bad times ahead don have much to do with relatively lower long rates. Short rates are rising not just because the buy moncler jackets Fed is hiking, but also because the market is awash in product, thanks to the Republican stimulus package. The Treasury needs to balance the books, after all, and is expected to issue almost a trillion dollars in debt cheap moncler outlet this year, and the year after, and the year after that. And most of that debt is short duration, which has pushed up yields on the left https://www.newmoncleroutlet.com hand side of the curve.So don worry, this hand argues: the flattening yield curve doesn have anything to do with an impending recession, but rather is a simple matter of highly unusual, post recession supply and demand in bond markets.But then there the third hand vestigial though it is which represents a little bit of doubt. economy needs it least. Its corporate tax cuts and capex write downs seem intended to stimulate output (although it not clear that happening yet). is getting shorter, as is the road to recession, and Canada is likely to follow.That assuming the supply side economics of the Trump tax cuts actually work. But even if they don would it be so surprising if a recession hit within the next 24 months, whatever moncler mens jackets the yield curve monlcer down jackets does? I mean (says the third hand), it been a long time coming for investors, there good news: even when the yield curve has inverted, stock markets historically have done very well in the months immediately following, at least until recession sets in.

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