Short tenor bond yield curve has inverted

 In Daily Hot Topics - Crude, Daily Hot Topics - Natural Gas, Daily Hot Topics - Power

First the good news, the more important long term bond yield curve (10 year minus 2 year) remains positive at +17 bps, up from recent low of +11 bps observed December 19, 2018.

Now the bad news, the less important short term bond yield curve (2 year minus 3 month) has inverted to -2 bps on January 3, 2019, first inversion since December 2007 through March 2008, leading up to the financial crisis.

Major bond yield curves are mixed;

  • Short tenor -2 bps, down -2 bps week on week, setting fresh new lows
  • Long tenor +17 bps, down -4 bps week on week, up from recent low +11 bps observed December 19, 2018

Long tenor yield curve inversion implications;

  • Fed Rate changes today take ~79 days to equilibrate yield curve
  • If yield curve goes inverted, high probability recession will follow ~393 days later

We’re following this closely, as inversion predicts recession, and recessions cause;

  • Crude prices fall -11% on US dollar rising +4%
  • Natural gas & power prices fall -34% on commercial and industrial sector demand destruction

For cEntellect’s Proprietary Research & Analysis on the yield curve, please see “Yield Curve Relationships” published June 28, 2018.

– Mike Reed

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