About Me

Retired chief investment officer and former NYSE firm partner with 50 plus years experience in field as analyst / economist, portfolio manager / trader, and CIO who has superb track record with multi $billion equities and fixed income portfolios. Advanced degrees, CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms: CAVEAT EMPTOR IN SPADES !!!

Wednesday, March 26, 2014

Analysis -- US Treasury Yield Curve (2 Yr / 10 Yr)

Attached is a link to the  most commonly used Treasury yield curve: $YC2YRhttp://stockcharts.com/h-sc/ui?s=$YC2YR&p=D&yr=3&mn=0&dy=0&id=p15064831307


Strong Slope: 300 basis points (BP) or higher short to long. Robust economy in early stage
when short rates are low and bond investors grow skittish. Generally Positive for stocks.
Flat Or Inverted: Shorter term rates on par with or higher than longer rates. Indicates that
credit / liquidity squeezes  have developed and implies economy in pre-recession mode.
Usually is a bearish indicator for stocks.

The chart shows the positive slope has recovered sharply since the news of and subsequent
implementation of the Fed's very large QE program. The current slope of near 230 basis points
reflects current investor bet that the economic expansion will not substantially accelerate plus a
continuing low inflation rate. The very narrow 120 bp slope in mid - 2012 shows just how
concerned the Fed was about the economy back then and how welcome QE was initially.

The dip in the yield curve in 2014 is a response to the impact of severe winter weather on the economy as well as a firming of the 2 yr. yield as the Fed hints about an eventual end to the
ZIRP program (The prospect of ending ZIRP has had little effect so far on the short end,
but if its specter draws nigh, expect short end yields to rise faster than longs).

Enough economic slack has been consumed in the economic expansion and the tensions
in my short term credit  supply / demand pressure gauge have increased enough to
make study of the yield curve more worthwhile going forward.


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