William J. Polley: December 2005 Archives

リンク: William J. Polley: December 2005 Archives.

So what are we to make of the yield curve inversion that happened this week? (See Econbrowser and macroblog for many, many links.)

Crawling the web for observations on this rather rare event led me to this Marketwatch/NY Times article.

The flat and now, inverted, yield curve poses a challenge for banks, hedge funds and other companies. They can't borrow at cheaper short-term rates to fund longer-term loans and investments that in a normal interest-rate environment pay more than their borrowing costs.

The important thing to remember here is that the curve has been flat for some time and, even if the inversion goes away tomorrow, it will still be flat. We're talking about a few basis points in either direction. This week's inversion does little if anything to revise my priors concerning the probability of a recession.

I don't make my living in the bond pit, so I can't say precisely what drives the day-to-day fluctuations of a few basis points. Goodness knows that we've all seen day-to-day gyrations in the bond market that are beyond our powers to explain. I have to imagine that the overall health and strength of the economy both short and medium term as well as some technical rebalancing at the end of the year are all converging. Note that the inversion is at the 2 to 10 year spread. Certainly a valid inversion, but the 2 year is not a maturity that is followed like the 3 month or 1 year maturity. Just to cloud things even further, there was an auction in the 2 year market today. From the same article,

The Treasury Department sold $20 billion worth of new 2-year notes Thursday at a yield of 4.402%, slightly above expectations. Overall demand was the best in three months, with $2.42 in bids received for each $1 of securities sold. But indirect bidders, which includes foreign central banks, took a lean 30.6% of the auctioned notes, lower than the recent average.

It is, of course, too early to discern the significance of foreign central banks taking fewer notes than the recent average. If you read this as being the beginning of a trend, it should mean higher interest rates in the short to medium term and increased danger of a "hard landing". Or, it could be a one-off event. While I'm not ready to place my bets just yet, I do have to admit that out of all of the yield curve inversion commentary, that was the line that gave me the most pause.

And that brings me back to the central message from this episode. A yield curve inversion is not a sure-fire indicator of a recession. It is a warning of a situation where expectations are out of the norm. When that happens, it's always a good idea to pay attention and try to figure out why.

毎日夜オフィスを出る時に、近くの高層ビルを見上げるのが習慣になっている。最近は夜も色々なな建物がライトアップされ中々きれいだ。29日は仕事納め。このビルは上層階に外資系のホテルが入り話題になっているが、客室の3分の一程度には光がともっているようだ。

この日、丸の内側のミレナリオ周辺をたまたま午後4時頃通りかかった。何故か既に相当の人通りなのは、早めに到着しておこうという人達が集まっているためか。午後4時から周辺道路の一部を閉鎖するために関係のスタッフが既に相当働き始めているようで驚いた。たばこを吸うための移動献血車の様な車も配置されている。そういったちょっとしたお祭り騒ぎの中を通り抜けた。照明がともっていない白い造作に時々目を遣った。

冬の乾燥した空気に澄み切った夜空をみているうちに、一年が過ぎたことを感じた。

今年一年の家族、親兄弟、親戚、友人、勤務先の同僚上司の無事に感謝。2006年も良い一年となりますように。

冬の乾燥した空気に澄み切った夜空をみているうちに、一年が過ぎたことを感じた。

今年一年の家族、親兄弟、親戚、友人、勤務先の同僚上司の無事に感謝。2006年も良い一年となりますように。