Rapidly flattening yield curve a recession danger sign, says NY Times

Rapidly flattening yield curve a recession danger sign, says NY Times

NY Times
27/06/18, 12:53 pm

(June 27): The so-called yield curve is perilously close to predicting a recession -- something it has done before with surprising accuracy -- and it’s become a big topic on Wall Street, says The New York Times.

The yield curve is basically the difference between interest rates on short-term US government bonds, say, two-year Treasury notes, and long-term government bonds, such as 10-year Treasury notes. Typically, when an economy seems in good health, the rate on the longer-term bonds will be higher than short-term ones.

The extra interest is to compensate, in part, for the risk that strong economic growth could set off a broad rise in prices, known as inflation. Lately, though, long-term bond yields have been stubbornly slow to rise -- which suggests traders are concerned about long-term growth -- even as the economy shows plenty of vitality.

At the same time, the Federal Reserve has been raising short-term rates, so the yield curve has been “flattening”. In other words, the gap between short-term interest rates and long-term rates is shrinking. On Thursday, the gap between two-year and 10-year US Treasury notes was roughly 0.34 percentage points.

It was last at these levels in 2007 when the US economy was heading into what was arguably the worst recession in almost 80 years. As scary as references to the financial crisis makes things sound, flattening alone does not mean that the United States is doomed to slip into another recession. But if it keeps moving in this direction, eventually long-term interest rates will fall below short-term rates, also known as “inversion”.

An inversion is seen as “a powerful signal of recessions”, as New York Fed President John Williams said this year, and that’s what everyone is watching for. Every recession of the past 60 years has been preceded by an inverted yield curve, according to research from the San Francisco Fed. Curve inversions have “correctly signalled all nine recessions since 1955 and had only one false positive, in the mid-1960s, when an inversion was followed by an economic slowdown but not an official recession”. Some economists on Wall Street think the economy could be growing at around a nearly 5% annualised clip this quarter. But if the current economic vigour is only reflecting a short-term stimulus coming from the Trump administration’s tax cut, then some kind of slowdown is to be expected.

Financial markets can sometimes sniff out problems with the economy before they show up in the official economic snapshots published on gross domestic product and unemployment. Another notable yield curve inversion occurred in February 2000, just before the stock market’s dot-com bubble burst. In that sense, the government bond market isn’t alone. Stocks have been in a sideways struggle since the S&P 500 last peaked on Jan 26. Returns on corporate bonds are negative, as are some key commodities  tied to industrial activity.

An important caveat to the predictive power of the yield curve is that it can’t predict precisely when a recession will begin. In the past, the recession has come in as little as six months, or as long as two years after the inversion, the San Francisco Fed’s researchers note. The flattening yield curve makes banking, which is basically the business of borrowing money at short-term rates and lending it at long-term rates, less profitable. And if the yield curve inverts, it means lending money becomes a losing proposition. Either way, the fl ow of lending is likely to be curtailed. And in the United States, where borrowed money is the lifeblood of economic activity, that can slam the brakes on economic growth.

Ex-remisier Ng denies being coached; RHB trader Alex Chew admits to telling the whole truth only in third statement

SINGAPORE (Apr 23): In Day Six of the trial of John Soh Chee Wen, the defence wrapped up their cross examination of the prosecution’s first witness, former OCBC Securities remisier Ng Kit Kiat. Ng had on Monday admitted to having performed trades without third-party authorisation. The trades performed without third-party authorisation included those based on orders given by a certain Ang Cheau Hoon Alice and Kent Eng Peng Huat, both of whom are remisiers at UOB Kay Hian, for accounts held by Ang's husband Poh Sian Hong as well as Eng's wife Yew Yong Mei. When asked by Soh’s defenc....

Singapore's pre-election cabinet change sets Heng up for top job

(Apr 23): Singapore’s Finance Minister Heng Swee Keat was promoted to deputy prime minister on Tuesday, a move that further positions him to succeed Prime Minister Lee Hsien Loong. Heng will become Lee’s deputy on May 1 while retaining the finance post, the prime minister’s office said in an emailed statement. He will also continue chairing the Future Economy Council and National Research Foundation. The sole cabinet promotion bolsters the odds that 57-year-old Heng will be the ruling People’s Action Party’s choice for prime minister after the general elections, which may come ....

OUE dumps stake in Nuvest Capital with no profit or loss

SINGAPORE (Apr 22): OUE announced it had sold its 33% stake in Nuvest Capital for US$1 million ($1.36 million). The buyer was Aje Kumar Saigal who owns the other 67% of Nuvest Capital. OUE acquired its 33% stake in Nuvest Capital in 2015 for US$1 million, so it has neither made a gain nor a loss. But in 2014, OUE invested US$200 million in Nuvest Real Return Fund which is managed by Nuvest Capital. Last Nov, OUE’s executive chairman had told analysts that the company plans to redeem the fund soon as it had not been profitable. In its FY2014 annual report, OUE's investment in t....