More indicators of recession

By Duru

January 2, 2001


Yep, the bear is roaring ever louder.

Has anyone noticed that shorter-term CDs are sometimes yielding MORE than longer-term ones? Well, this is because shorter-term treasuries are doing the same thing to long-term ones.

Here is the current data (see, for example,

Treasuries Yield

30 Year T-Bond 5.42%

10 Year T-Bond 5.11%

2 Year T-Bond 5.11%

1 Year T-Bill 5.38%

6-month T-Bill 5.76%

3-month T-bill 5.9%


I won't go into all the technicalities now, but this condition arises when the Fed raises short-term rates so fast that bond investors predict a serious slowing, or even contraction, in the economy, obliterating fears of inflation and making long-term bonds ever-more attractive. Now I am still not sure what is up with the T-bond vs T-bill, but the articles I am seeing keep saying the we indeed have a "serious" yield inversion. I have also read, particularly in "The Message of the Markets" that this inversion is the surest predictor of recession that we have (a study by the NY Federal Reserve Board). Since World War II, it has forewarned of recession in 9-12 months with near CERTAINTY. Interestingly, the last inversion was in late 1999-early 2000. If we were paying attention we could have easily foreseen the slowdown that came NINE-TWELVE MONTHS later...that is late 2000 and early 2001!!! The caveat to that inversion is that the US Government was buying back a lot long-term bonds as part of its deficit reduction, so it made the signal a bit fuzzier as a predictor of an outright recession. We apparently do NOT have that fuzziness now.

So, basically, the Fed's reversal on short-term rates is especially critical to us now. If they are not already too late, we can turn this baby around. If they are not too conservative with rate reductions, a true recession MAY be averted. An outright slowdown is already underway, and we are not reversing that anytime soon. Essentially, or biggest risk is that we are one shock away from a recession regardless of Fed action. For example, a disruption in world oil supplies, a complete breakdown of the power grid in California, etc....

I am still looking for more data on these yield curves, if you are interested, I will let you know what I find in the coming week....