Bond Yields and Recessions (Update)
I am reposting this important chart as I made some mistakes prior.
Understanding the basics of Bonds is very important to traders/investors. Yields (interest rates) are like gravity to other
asset classes. The higher yields go the more gravity on other asset classes. Most are unaware of this simple rule bc most
traders today have never had to deal with inflation and rising rates.
I can't go too much more in explaining it all here so we will talk more about the chart. First off for those of you who
subscribe to MMT out there, you should know the theory that a central bank sets rates is simply wrong. The Free Market
determines rates (Yield) based on economic conditions.
Next pay attention to the red line EFFR (Effective FED Fund Rate) it is almost always chasing the FREE market up or down.
Right off the bat what is obvious is that all rates have a tendency of bunching up before a recession. What is also obvious
is that a recession has not occurred while FED is raising rates. Yet I hear many "experts" (people with large followings nothing more)
call for a recession for months now. For months they have been horribly wrong. Again unaware of yet another very simple rule.
I call them "FED PIVITOORS".
What else is obvious? During a recession, short-term yields & longer-term yields spread out and remain so during the recovery.
Then start to bunch up but still that in itself is not a recession. In fact, it is not until FED is done raising rates for a while that
a recession follows and rates start to fan out and FED chases the free market by lowering short-term rates.
While no single chart is the holy grail of analysis this particular chart right now is not in a recession. That should be clear to all.
Saying that we are getting closer to a recession is okay, we must avoid saying "something bad will happen eventually" it's kinda useless
info. At the same time if you wait to see the chart reflect a recession, well it will be too late in most cases. There are other things
to look at when forecasting a recession that is much more helpful.
Understanding the basics of Bonds is very important to traders/investors. Yields (interest rates) are like gravity to other
asset classes. The higher yields go the more gravity on other asset classes. Most are unaware of this simple rule bc most
traders today have never had to deal with inflation and rising rates.
I can't go too much more in explaining it all here so we will talk more about the chart. First off for those of you who
subscribe to MMT out there, you should know the theory that a central bank sets rates is simply wrong. The Free Market
determines rates (Yield) based on economic conditions.
Next pay attention to the red line EFFR (Effective FED Fund Rate) it is almost always chasing the FREE market up or down.
Right off the bat what is obvious is that all rates have a tendency of bunching up before a recession. What is also obvious
is that a recession has not occurred while FED is raising rates. Yet I hear many "experts" (people with large followings nothing more)
call for a recession for months now. For months they have been horribly wrong. Again unaware of yet another very simple rule.
I call them "FED PIVITOORS".
What else is obvious? During a recession, short-term yields & longer-term yields spread out and remain so during the recovery.
Then start to bunch up but still that in itself is not a recession. In fact, it is not until FED is done raising rates for a while that
a recession follows and rates start to fan out and FED chases the free market by lowering short-term rates.
While no single chart is the holy grail of analysis this particular chart right now is not in a recession. That should be clear to all.
Saying that we are getting closer to a recession is okay, we must avoid saying "something bad will happen eventually" it's kinda useless
info. At the same time if you wait to see the chart reflect a recession, well it will be too late in most cases. There are other things
to look at when forecasting a recession that is much more helpful.
Real Macro Economic Investing
patreon.com/Realmacro
patreon.com/Realmacro
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