
10-Year Treasury Constant Maturity Minus 3-Month Treasury Constant Maturity - inflatableDodo
https://fred.stlouisfed.org/series/T10Y3M
======
cs702
For context, this has happened before, prior to recessions, as shown here:
[https://fred.stlouisfed.org/graph/?g=mtiz](https://fred.stlouisfed.org/graph/?g=mtiz)

However, this is the first time this kind of yield inversion has occurred
right after the Fed announced plans to stop reducing its balance sheet, which
grew to _unprecedented_ levels in response to the financial crisis. You can
see the enormous impact that the Fed's balance sheet growth had on the
monetary base here:
[https://fred.stlouisfed.org/graph/?g=lIdk](https://fred.stlouisfed.org/graph/?g=lIdk)

Until recently, the Fed had been reducing its balance sheet by up to
$54B/month; it announced plans to stop.[a][b] How and to what degree has this
impacted yields?

As additional context, consider that the yield inversion has occurred during a
rise in import tariffs, trading restrictions, and public threats between the
US and China (and now Mexico too). So far, the economic impact of these
trading spats _on the US economy_ has been small.[c] Could the recent yield
inversion be caused more by a global flight to safety. in conjunction to the
Fed's actions, than the actual risk of a US recession?

Is it even possible to answer these questions with certainty? I'd be leery of
any predictions for the US economy based solely on this recent inversion of
the yield curve.

[a]
[https://www.federalreserve.gov/monetarypolicy/bst_recenttren...](https://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm)

[b] [https://www.reuters.com/article/us-usa-fed-
balancesheet/fed-...](https://www.reuters.com/article/us-usa-fed-
balancesheet/fed-announces-plan-to-end-balance-sheet-runoff-in-september-
idUSKCN1R12QA)

[c] [https://www.nytimes.com/2019/05/07/us/politics/trump-
tariff-...](https://www.nytimes.com/2019/05/07/us/politics/trump-tariff-china-
economy.html)

~~~
nickles
> How and to what degree has this impacted yields? Is it even possible to
> answer this question with certainty?

To reduce its balance sheet, the Fed has rolled down assets, allowing them to
mature. By choosing to not reinvest the principal from these matured assets,
they reduce the size of the balance sheet. My understanding is that the
reinvestment occurs in longer dated securities, which would put flattening
pressure on the curve. Estimates indicate a reduction of these purchases would
raise 10y yields 40-60bps [0]. All other things being equal, this would lead
to steepening of the yield curve.

> I'd be leery of any predictions of recession in the US based solely on yield
> inversion.

Not all yield curve inversions have preceded recessions, but almost all recent
recessions have been preceded by yield curve inversions. Yield curve
inversions lasting 10 days or longer tend to have more predictive power. The
inversion in March did not last that long, for example. On average, a
recession follows 14 months after an inversion [1].

[0]
[https://www.ft.com/content/828169e8-8902-3d5a-903d-586bf22cc...](https://www.ft.com/content/828169e8-8902-3d5a-903d-586bf22cc35c)

[1]
[https://www.advisorperspectives.com/articles/2019/04/01/a-hi...](https://www.advisorperspectives.com/articles/2019/04/01/a-historical-
perspective-on-inverted-yield-curves)

~~~
asmithmd1
It looks like a 10Y-3M inversion has predicted each of the last 3 recessions
by about a year with no false positives in the last 35 year.

[https://fred.stlouisfed.org/graph/?g=o4ro](https://fred.stlouisfed.org/graph/?g=o4ro)

Of course maybe this time is different...

~~~
mrep
Assuming you use 0 as your magic ball number. Move the magic ball number up
just a tiny bit to 0.07 and you would have had a false positive in september
1998. You could also move it down to -0.32 and you would still a 100% success
rate, albeit with a sample size of 3...

------
bradleyjg
Given that every reliable trading signal inevitably gets arb’ed away why does
everyone and his brother think this one must be rock solid?

~~~
inflatableDodo
Someone please correct me if I have misunderstood anything here, but having a
better rate for a bond that matures after 3 months, than for one that matures
after 10 years, is definitely a bit odd.

~~~
nickles
If you purchase a 3m treasury bill, you will have to roll your capital into
another in 3 months. If you expect the Fed to cut rates in the interim, you
will receive a lower yield on that bill. The discount on the bill helps
compensate for that risk.

~~~
inflatableDodo
I suppose the fed could cut rates in the next three months, however currently
they are mostly making noises about not moving it up or down. Other people's
current predictions on this are all over the place and seem more dependent on
what each author would prefer than neccessarily any reality. I can find
mainstream articles telling me why the fed must move rates up and others that
insist that they must move them down. This makes me suspect that the fed is
probably going to remain roughly fixed, at least for a bit.

~~~
nickles
> Other people's current predictions on this are all over the place and seem
> more dependent on what each author would prefer than neccessarily any
> reality.

Expectations of Fed rate hikes and cuts are reflected in the fed funds futures
market, where participants estimate future values of the fed funds rate.
Currently, the market implies a 94% chance of at least one rate cut by
December [0].

[0] [https://www.cmegroup.com/trading/interest-rates/countdown-
to...](https://www.cmegroup.com/trading/interest-rates/countdown-to-
fomc.html/)

------
yasp
Isn't it the 10Y-2Y which is the famous recession signal?

~~~
nickles
No, 3m-10Y is the best recession signal for the United States.

[0] [https://www.frbsf.org/economic-
research/publications/economi...](https://www.frbsf.org/economic-
research/publications/economic-letter/2018/august/information-in-yield-curve-
about-future-recessions/)

~~~
ianai
They’re graphing 10y-3mo here. Is that what you mean? Minus is not
commutative.

~~~
nickles
> They’re graphing 10y-3mo here. Is that what you mean? Minus is not
> commutative.

The synthetic instrument 3m-10y is referred to as a 'curve'. It can be denoted
3m-10y. Convention is such that the value of a curve is long dated tenor minus
short dated tenor.

~~~
FabHK
Just to expand on this:

One _names_ the spread by denoting the two instruments, by convention first
the short dated, then the long dated (for example, 2y/10y or 3m/10y or indeed
3m-10y, where the '-' is a hyphen).

One _computes_ the spread by subtracting the short dated yield from the long
dated one (ie, 10y - 3m, where the '-' is a minus).

~~~
ianai
Is that convention documented anywhere? It’d be quite helpful to me.

~~~
FabHK
Not that I know of. A lot of financial market conventions and practices are
not very well documented, or not easily obtained at any rate. For example, a
lot of terms and conventions pertaining to interest rate swaps are available
in the 2006 ISDA Definitions (and equivalents for equity, FX, credit, etc.),
but they're not available online legally AFAIK (though you might find them).

It contains gems such as this:

> Section 4.11. FRN Convention; Eurodollar Convention. “FRN Convention” or
> “Eurodollar Convention” means, in respect of either Payment Dates or Period
> End Dates for a Swap Transaction and a party, that the Payment Dates or
> Period End Dates of that party will be each day during the Term of the Swap
> Transaction that numerically corresponds to the preceding applicable Payment
> Date or Period End Date, as the case may be, of that party in the calendar
> month that is the specified number of months after the month in which the
> preceding applicable Payment Date or Period End Date occurred (or, in the
> case of the first applicable Payment Date or the Period End Date, the day
> that numerically corresponds to the Effective Date in the calendar month
> that is the specified number of months after the month in which the
> Effective Date occurred), except that (a) if there is not any such
> numerically corresponding day in the calendar month in which a Payment Date
> or Period End Date, as the case may be, of that party should occur, then the
> Payment Date or Period End Date will be the last day that is a Business Day
> in that month, (b) if a Payment Date or Period End Date, as the case may be,
> of the party would otherwise fall on a day that is not a Business Day, then
> the Payment Date or Period End Date will be the first following day that is
> a Business Day unless that day falls in the next calendar month, in which
> case the Payment Date or Period End Date will be the first preceding day
> that is a Business Day and (c) if the preceding applicable Payment Date or
> Period End Date, as the case may be, of that party occurred on the last day
> in a calendar month that was a Business Day, then all subsequent applicable
> Payment Dates or Period End Dates, as the case may be, of that party prior
> to the Termination Date will be the last day that is a Business Day in the
> month that is the specified number of months after the month in which the
> preceding applicable Payment Date or Period End Date occurred.

------
tyrust
Without any sort of annotation or explanation this post isn't really valuable.

That said, with annotation and explanation it would only be incrementally more
valuable. TA is like reading tea leaves.

~~~
FabHK
This is not technical analysis, this is a macroeconomic indicator. No voodoo
here.

~~~
tyrust
Call it what you want, it's still people trying to make predictions based on
limited signal. As the top comment says, this alone isn't necessarily
meaningful.

