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Thank you for this extremely well presented commentary.
Perhaps you or others would respond to my comments.
One of the very curious aspects the recent inversion of the yield curve
was that it occurred in the context of generally declining long term
interest rates to plumeting long term rates. I have never observed that
before. In my checking of
some yield curve history I could not find previous examples of declining
rates with inversion. I interpreted (apparently erroneously) the
declining long rates as being both beneficial to the economy and to
stock prices and more important than the inversion.
Jerry Rehert wrote:
> Here's an interesting bullish perspective on the
> bonds.=======================================Bonds' Crystal Ball: Good
> Times
> By Tony Crescenzi
> Chief Bond Market Strategist, Miller Tabak & Co., LLC, and CEO of
> Bondtalk.com
>
> Dec 12, 2000 11:20 AM
>
>
>
> [Image]
>
> The stock market ought to borrow the bond market's crystal ball.
> Fluctuations in the Treasury market accurately predicted many of the
> past year's economic developments, and right now, they're calling for
> improving growth prospects in the months ahead.
>
> Investors who heeded the warnings implied by the yield curve - the
> relationship of short- and long-term Treasury rates - at the start of
> the year now are sitting pretty. Everyone else seems caught in the
> headlights of a changing economy.
>
> Before I go on, let me give you a little primer on the yield curve.
> For simplicity's sake, I'll speak only in terms of U.S. Treasuries.
> The yield curve basically plots the yields of bonds carrying different
> maturities, usually ranging from 3 months to 30 years. It looks
> something like this:
>
> Bond investors analyze the
> difference between yields of
> short- and longer-term securities. The spread between the 2-year note
> and 30-year bond is one commonly used benchmark. Normally, the longer
> issue should yield more than the shorter instrument, producing a
> positive-sloping yield curve. The reverse arrangement, which we
> currently are experiencing, is called an "inverted yield curve."
>
> The shape of the yield curve can mean a variety of things to bond
> investors, but there are two basic ways of looking at it.
>
> First, a positive slope usually indicates the Federal Reserve's
> monetary policy stance is and will likely continue to be friendly
> toward the markets. Since Fed policy influences short-term rates most
> strongly, they tend to be low when Fed rates are falling or being held
> at a relatively low level.
>
> At the same time, easy Fed policy promises stronger growth and
> potentially higher inflation in the months and years ahead, so longer
> rates tend to rise or hold steady when the Fed is cutting rates. A
> steepening yield curve generally foreshadows good times for stock
> investors over a several-quarter horizon.
>
> On the other hand, a negatively sloped yield curve usually indicates
> that Fed policy is unfriendly, with the Fed raising official interest
> rates to slow the economy. This, of course, generally portends a
> gloomier set of conditions for the equity market and the economy.
>
> Perhaps investors should have expected the economic growth spurt of
> the first half of this year would be followed by a deceleration.
> Certainly, that's what the yield curve foretold when it inverted back
> in January 2000. Many investors and analysts dismissed the inversion
> as related to technical factors, such as Uncle Sam's buyback of the
> national debt. But there were clearly other reasons for the inversion
> that had implications for the markets and the economy.
>
> First of all, the bond market started believing the Fed would have to
> raise rates aggressively to slow the economy. That's exactly what
> happened -- the Fed raised rates one full percentage point over the
> next four months. In turn, bond investors began to believe economic
> growth would decelerate. It did.
>
> Stock investors took more time to heed the yield curve's message that
> the Fed would put its chokehold on the economy - but not much more
> time. It's probably no coincidence that the Dow Jones industrial
> average peaked the same month the yield curve inverted. The S&P 500
> and the Nasdaq peaked just a couple of months later, in March.
>
> So what is this crystal ball telling us now?
>
> For starters, note that the yield curve became positively sloped (from
> 2 years to 30 years) for the first time since January just this past
> Friday.
>
> The return to a positive slop has a few implications for the markets
> and the economy. First and foremost, it indicates the markets expect
> the Fed to start working toward economic stimulus. Indeed, the bond
> market is expecting for the Fed to cut rates as early as the end of
> January.
>
> Second, the bond market believes the economy will regain its footing
> again after a period of weakening.
>
> The rate-cut hope also augurs well for the stock market because lower
> rates typically boost economic growth, thereby boosting corporate
> earnings. Lower rates, of course, also reduce the competition for
> capital, as investors flee lower-yielding interest-rate products and
> move to stocks, where returns are usually much higher.
>
> The increased hope for a friendlier Fed is already helping cyclical
> companies, including basic materials companies such as Dupont,
> International Paper, and Caterpillar. Retailers have also started to
> gain: Wal-Mart {WMT} and Sears {S}, for example, have been grinding
> upward. All of these companies have one thing in common: hope that the
> Fed will cut rates and thereby invigorate the expansion and boost
> corporate profits.
>
> If these hopes are fulfilled, we will be able to look back and say
> that the yield curve called it. Again.
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