Toshio Matsuda, Samurai Lecturer, Commentator & Intl Economist
(This issue is submitted to a Washington D.C., Seattle, and Zurich think-tank as the English edition of “Straight from Shoulder”.)
"Straight from the shoulder " by Toshio Masuda-Samurai Lecturer
August 19, 2019
( Free of charge to the people I met)Yield Inversion is Nothing to worry about
Yield inversion in the US bonds market, that took place on August 14 for the first time since 2007, caused NY Dow index drop 800 points, to $25,479.
Early on Wednesday morning the yield on the US 10-year Treasury bonds fell briefly by one basic point, to 1.59%, below the yield on the US 2-year Treasury bonds.
The spread between these two debts has always been regarded as a reliable indicator of recession.
Since 1969 seven recessions came hard on the heels of the 10-year bonds’ yield falling below that of the 2-year ones.
Yet I do not believe that the past experience can be regarded as a reliable predictor of the future, since the fiscal environment in global economies is now totally different from what it was in the past.
On the same day, Wednesday August 14, the German 10-year bond yield was -0.657, the French -0.3715 and the Japanese -0.22.
As there are no barriers to the Fed rising interest rates, US bonds were set to redress these anomalies vis-a-vis other advanced economies.
The situation is best illustrated by this little story:
A big kid wearing thick coat is walking north. At some point he turns south and finds himself on the road where other kids are walking, wearing thin coats. So he decides to change his clothes. Now, when all the kids walk the same road, wearing the same thin coats everyone is happy: no panic, no recession, they all travel together and are no different from each other.
The U.S. bond yield short or long term, coming close to others of zero or minus is the natural trend of markets and nothing to do with any kind of panicking.
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Written by Toshio Masuda