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comment by wasoxygen
wasoxygen  ·  117 days ago  ·  link  ·    ·  parent  ·  post: US Treasuries Never Wrong - well, not really

    Even if your bonds mature in the middle of a recession and you find yourself with cash and few good fixed-income options, at least you made some initial yield, no?

Yes, you're ahead after Year 1 having bought the short-term bond with a higher rate, but now you have to find something to do with your cash for the next nine years, while your alter ego has the reliable income of the ten-year bond. You got more income but less predictability. If your options are poor after one year, you might end up behind over the decade.

I don't understand why the animation plots the yield curve over time against the actual 3-month yield.

    This is an animation showing the 3 month US treasury yield (blue line) versus the implied forward yield curve (red). The forward yield is estimated looking at the yields on 3, 6, 9 mo and 1, 2, 3, 5, 7 and 10 year government bonds. The blue highlighted area shows where the yield curve underestimated actual results and the ping highlighted area shows overestimations.

The red line is the yield curve from March 2007, pretty closely matching the official numbers from that month, so I don't see why it's "estimated" or "implied."

The gap between the 5-year rate in March 2007 (about 4.5%) is vertically contrasted with the March 2012 3-month rate (about 0.1%) and the "over-estimated area" between colored red. What is that supposed to represent? Five-year rates are not predictions of what three-month rates will be in five years.

    I place 70% confidence that a 10-year US Treasury compared to the 2-year US Treasury will invert sometime within a month of February 2019, and then within 12 months of that inversion we will see the peak of the bull run, and then 6 months from the peak will be a recession.... By the way, that differential today is .22%.

I love a prediction. Can we stipulate as an authorative source? They show rates of 2.92% for a two-year and 3.20% for a ten year T-bill, a gap of 0.28%. I don't know who calls the peak of a bull run, but NBER seems to have say-so over recession dating.

blackbootz  ·  116 days ago  ·  link  ·  

+1 for short-term bond demand-decrease explanation.

I think the animated yield curve is "estimated" or "implied" because of the interpolated yields along the line (there isn't a bond between 3 and 6 months, but the line implies there is one).

I, too, don't understand the purpose of the pink and blue shaded regions. I'm trying to wrack my brain because the animator issues economic advisory reports for a team of researchers so there must be a reason, right? I'm wondering if reaching out would be worthwhile, if 2014 is too long ago to remember, or if the animation was outsourced.

    I love a prediction. Can we stipulate as an authorative source? They show rates of 2.92% for a two-year and 3.20% for a ten year T-bill, a gap of 0.28%. I don't know who calls the peak of a bull run, but NBER seems to have say-so over recession dating.

Yes, I love a prediction, too. My prediction: inversion of 10-year rates and 2-year rates + or - one month of February 2018, with a peak of the stock market (as measured by Google ticker for S&P 500? I'm open to suggestion) 12 months after with a one month margin of error (so if an inversion occurs in January 2019, a stock market maxima has to occur within December 2019 - February 2020) with an NBER-marked recession within 6 months hence.

I'm tempted to say that a stock market peak has to occur within the following year, rather than within a narrow 3-month band, but the data is pretty strong that the post-inversion stock market peaks occur a healthy amount of time after, so the prediction will stay as such.

wasoxygen  ·  116 days ago  ·  link  ·  

I see; the yield curve chart is a smooth estimate of the rates you could imagine getting if terms were offered between the official periods like 6 months, 1, 5, or 10 years.

Per Mr. Laird, the animation is intended to show that today's rates are poor estimators for future rates. I can't imagine why anyone would think they are good estimators. It seems to me that today's 3-month rate is a better guess for the October 2023 3-month rate than today's 5-year rate, if you had to guess.

I wouldn't know where to begin to make such a prediction, so I am impressed by your effort. I will take the cowardly, easy route and predict that at least one of these will NOT happen:

• The 2-year T-bill rate is higher than the 10-year T-bill rate on any day from 1 January 2019 to 31 March 2019.

• If such an inversion occurs, then the S&P 500 Index as reported by Google will have a higher value on at least one of the 365 days before the inversion date, or during days 395 to 760 after the inversion first occurs, than it does at its highest value in the 394 days following the inversion.

• If such an inversion occurs, NBER will add a new business cycle to its list of business cycle reference dates with a "peak" date during the six months following the S&P 500 maximum described above.

My confidence level is 90%, not because I know what I am talking about, but because of the conjunction law.

blackbootz  ·  106 days ago  ·  link  ·  

When would be a good check-in date to resolve this? The conceivably-latest point at which my prediction would still hold would be August 2020 (if NBER states a recession started at least as late as February 2020).

wasoxygen  ·  106 days ago  ·  link  ·  

I’m free then.