Gary Tanashian | Jan 15, 2024 18:47
While it is far from the only important indicator for the markets, the 10-2 Year Treasury Yield Spread is very important because it takes what is probably the most important market for macro signaling (the bond market) and gives us a view into the dynamics between short and long-term yields. In the bond market, duration means a lot.
For one example, long-term bonds are much more vulnerable to inflation’s negative effects than short-term bonds. Short-term bonds also act as a liquidity haven during deflationary market crises. Long-term bonds can work quite well during disinflationary times and pay out better income than short-term bonds, but in a full out deflation scare when the very system (and its exponential debt load) comes into question insofar as you want bonds, you want short-term (in my experience 1-3 year Treasury, T-bills and Treasury Money Market). In other words, relative safety.
From an American perspective, as long as the government says that stuff is safe it is safe. As long as the government is intact and functioning, that is. But it is only safe because of the fact that the governing body of a society long past its shelf life of sound monetary management says so. Otherwise, it’s a government operating under the dual pressure of unpayable debt (short of attempting to inflate it away) and waning confidence – with the first overt sign of revolution occurring on January 6, 2021.
So, short-term Treasury bonds are safe. But short-term Treasury bonds are not really safe, are they? They sure are not gold in that regard. Unlike the trillions in debt attached to the US and many global bond and currency markets, gold has no such liability as it pays no income and is just an old rock that ancient societies used as money. It had stability in its finite quantities and the fact that it was no one else’s debt. Today it is just an anchor within the storm of modern finance and in a storm you probably want your boat to be well anchored lest it be tossed to and fro and cast upon the rocks as wreckage.
But the bond market is absolute gold as a macro signaler. Look no further than the Continuum chart we have used over the last 15 years to identifying the correct macro backdrop at any given time. Since the 1980s, and until 2022, that backdrop was signaled to be disinflationary by definition of the gentle, robotic trend downward in long-term yields.
I realize that just above I sound like the BRICS-promoting/De-Dollarizing people I sometimes criticize. But the criticism is only for the ‘perma’ nature of those views. There is a thing called timing and another thing called activation. On a big picture, measured over years, the shift in the macro may shake out per the above and become activated.
Here we have the yield curve (10yr-2yr), doing as expected and breaking upward from the latest consolidation that gave Goldilocks a new bounce in her step as silly Santa season came to an end in December. The steepening yield curve can come under pressure of deflation or inflation or, over the course of an extended steepener, both at varying times. What it will do is signal to Dorothy that “we are not in Kansas anymore” and likely signal pain for herds of trend followers most recently conditioned by the previous flattener into inversion. That pain could come deflationary or inflationary. It’s the steepening that tends to hurt Goldilocks, one way or the other.
As for the steepening, it is heading toward de-inversion. Remember now that the media and mainstream economists have been touting the dangers to the economy of an inverted yield curve. Now that the curve has started to steepen might that not be part of the relief felt by today’s ‘happy days are here again!’ soft landers? All along we have noted that it is not the inversion that brings on the pain. It is the steepener that follows the inversion. But why let reality get in the way of good media stories?
The signaling by the yield curve is that regardless of whether it sticks to the deflationary view that has been our primary 2024 view or takes on in interim inflationary flavor (ref. Thursday’s public article) Goldilocks is destined to get eaten by 3 pissed off bears. Goldilocks dies when pleasant disinflation morphs deflationary and she also expires when it morphs inflationary.
h2 Bottom Line/h2Changes are at hand for 2024. I don’t say so. The bond market says so. Our plan has been for those changes to be disinflation to a coming deflation scare. But the decline in yields since the October ‘call’ below :-) has been significant. For reasons illustrated in the article linked above we can also be aware of something unexpected by a majority (unlike a year ago), like an interim inflation trade.
NFTRH 792 then moved on to its usual coverage of US and global stock markets, precious metals, commodities, currencies and portfolio discussion.
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