Friday, September 13, 2019

Yield Curve mid-September 2019 update

There has been quite a lot of movement in yields since last month, so I thought it would be useful to look at an update.

During the last half of June and July, the long end of the curve came down while the short end moved up a little bit.  I wish we had an NGDP futures market to check these intuitions against, but I think the best interpretation is that in June the Fed had reversed track a bit and signaled more dovish policy going forward, but then some compromises in that posture began to arise, so while they certainly are more dovish than they were several months ago, some of the optimism that was pressing long end rates higher in June has receded.

The slope of the curve from two years onward has remained relatively stable since then and the movements have mostly been movements in the estimated low point of yields in 2021.

At first glance, rising rates since the end of August are bullish.  But, that is entirely due to rising short term rates.  The long end has actually flattened slightly compared to the beginning of August (the blue line compared to the pink line).  There are obviously a mixture of factors here, and continued strength in the labor market is probably one reason for optimism.  But, it seems to me that the net movement of the past two weeks is probably bearish.  Less faith that a dovish commitment by the Fed will prevent a bit of a downturn.  That would lead me to suspect that the coming decline in the target short term rate will be somewhat tepid and will be associated with a sympathetic decline in the long end of the curve at first, back toward or below the levels of late August.


  1. If the Federal Reserve, due to globalized capital markets, has lost meaningful influence over long-term rates, then what means an inverted yield curve?

    If long-term rates are set in glutted global capital markets, and markets that appear to have prospects of remaining glutted for decades....

    The uncomfortable question for Market Monetarists is if we do have globalized capital markets, then what means the actions of a lone central bank?

    So the Fed raises or lowers short-term rates? So what?

    So the Federal Reserve buys 4 trillion dollars of sesurities in a world that has 350 trillion dollars of assets in bonds, stocks, and property?

    If the globe goes into a recession, does it make more sense for the Federal Reserve to buy a few trillion dollars of securities on globalized capital markets, or to print up one trillion and spend it inside US borders?

    My take on orthodox macroeconomics is that it anticipates an essentially closed economy, but the world has changed in the last 30 years particularly in relation to capital markets.

    1. I wouldn't attribute the inverted yield curve to some sort of central bank price fixing. The low long term rates are a sign of poor expectations, and I think the reason inversion tends to be predictive is that a combination of expectations, credit availability, and market frictions prevent the curve from inverting as much as it should, leading to disequilibrium. I suspect part of the story, and part of the monetary connection, is that falling yields on long term financial securities (importantly, including real estate) are associated with rising prices. But, rising prices require money.