Faith In Central Banks Again In Question: Ominous Implications For Bonds

All eyes are following implications of a yield curve inversion. A crucial portion of the curve signals something else.

I have been tracking, as has nearly everyone else, the constant flattening of the yield curve to the point that portions of the curve are now inverted.

Despite the near-relentless flattening on most portions of the curve, the 30-year to 10-year spread started diverging in July.

I have been watching this for weeks and the 30-year yield is the fasted to rise and slowest to drop on a relative basis. Here are a couple of recent screen shots to show what I mean.

Relative Weakness of 30-Year Bond

 

This does not happen every day, but on balance it has been happening since July 9.

What's It Mean?

  • This is not necessarily easy to decipher, and perhaps it is just random and means nothing at all.
  • However, I suggest the long bond is signaling huge concerns over increasing deficits and mounting debt, now over $21 trillion.

Fed Rate Cuts

The bond market has also signaled the end of rate cuts. I posted charts yesterday in Rate Hike Odds Dive: Any Rate Hikes in 2019? Sucker Rally? Musical Tribute!

Yesterday I asked: Rate hikes coming? Full inversion?

With a tribute to Buddy Holly, here was my answer: Maybe Baby, but I doubt it.

Enter Kudlow

Today we see that White House economic adviser Larry Kudlow expects pause on Fed rate hikes.

Recession Coming 2019, Full Inversion Not

I think a recession in 2019 is now baked into the cake.

If so, and if the Fed does stop hiking, I doubt the 3-month to 30-year yield curve inversion that people seem to expect will occur.

 

Gold vs 30-Year to 10-Year Spread

 

Gold's action roughly matches the direction of the 30-year long bond to 10-year treasury not spread. Bear in mind this just started happening in 2006 following a long pause in the issuance of the 30-year bond.

Longer charts do not show that correlation. But other spreads are completely random.

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