Monday, August 29, 2011

Yield Curve vs Real GDP Growth

August 29, 2011
Long Bond Shows No Double Dip in Yield Curve Five Times Average Since 1981

The economy has never contracted with the difference between 10- and 30-year Treasury yields as wide as the current 1.34 percentage points, or 134 basis points, since the so-called long bond was first issued in 1977.

Never! So here's a brilliant thought. Let's just peg short-term interest rates at zero forever. No more inverted yield curves. Hurray! We've already done it for 2 1/2 years. Let's shoot for infinity. Unlike Japan, I'm sure we'll NEVER have another recession. Why hasn't anyone thought of this before me? Genius!

Here's a chart showing the average spread between the 1 year treasury and the 10 year treasury in a given quarter and then comparing that to the real GDP growth of the following quarter. As you can see, the bond market is an amazingly brilliant forecasting tool. It sees all!

Click to enlarge.

It is comparable to what untrained monkeys could do!

Yes, sir. Time to go long stocks. No doubt about it. Stocks have fallen a bit like they did in mid-2008. The yield curve is similar to that in mid-2008. I'm incredibly optimistic that nothing can ever go wrong again. Everything has been permanently fixed.

And when I say fixed, I really mean bribed, bought off, corrupted, fiddled, greased, maneuvered, string pulled, and tampered with. Nothing but biscuits and gravy from here!

Bonus Thought

Speaking of the word never, we've never seen $4 gasoline without there being a recession in the months that followed. Never! Yeah, we're 1 for 1 so far. I'm not counting the most recent spike to $4. We don't yet know how that will work out.

So what happens when an irresistible oil force meets an immovable yield curve? Brace for impact!

Source Data:
St. Louis Fed: Real GDP
St. Louis Fed: 1-Year Treasury Yield
St. Louis Fed: 10-Year Treasury Yield


WSM said...

My guess is that long bond yields will drop closer to intrinsic value around 3.25%, bringing the spread closer to 100 basis points.

The 'irresistible oil force' will win out.

Mr Slippery said...


I wanted to add some color to the panic late but not too late thesis. Until 2007, I was floating along, doing my job, buying the stocks for the long run lie. Then, I started digging into The System on my own and came to startling and shocking conclusions.

I think my understanding has come a long way since then. I'd like to think I would panic in 2004 like you, knowing what I know now, but I don't feel bad about being lucky. In conclusion, panic first is the right play, but being lucky is better still. ;)

I have no cure for sleeping better that doesn't involve chemicals.

My advice for new investors:
1. be lucky
2. panic first
3. have plenty of chemicals

Stagflationary Mark said...


For what it is worth, I'm expecting the 30 year TIPS yield to hover around 1% from here on out. I'm fine owning it at these prices but the lowest lying fruit has already been picked.

I'm basing it somewhat on Japan's yield curve.

Stagflationary Mark said...

Mr Slippery,

I have no cure for sleeping better that doesn't involve chemicals.

I have found that reaching an exhaustion point can work. I just can't sustain it.

Perhaps there is money to be made selling chemicals for that.


When you need the deep sleep that only 100% exhaustion can provide.

Also works on nest eggs!

Warning: Should exhaustion last more than 2 decades seek medical and/or economic attention immediately.

Mr Slippery said...


I have been mentally exhausted for a month now trying to keep the nest egg growing. On vacay now, but not resting much. Sigh.

Maybe I can sleep better once I get back to work after labor day. After all. Obama is going to put everyone to work. Sigh.

Stagflationary Mark said...

Mr Slippery,

Rest assured knowing that the economy can't contract. The steepness of the yield curve *proves* it.

You can't even get an inverted yield curve when the Fed ANCHORS the short end to zero! No more recessions!

Anchored is yet another word that means fixed.

And when I say fixed, I mean in that horsetrack way when all longshots start looking like sure things.

Prosperity here we come. I am filled with confidence games! ;)

Stagflationary Mark said...

The "Sure" Thing

Fixed I tell you! ;)

fried said...

Mark, thought you might find this interesting if you have not seen it.
Bill Gross is now saying that selling off treasuries was a mistake, and he is buying again...

Stagflationary Mark said...


From your link...

“I get that it was my/our mistake in thinking that the US economy can chug along at 2 per cent real growth rates. It doesn’t look like it can.”

Bingo! He should inform Jeremy Siegel of his findings.

Unless we’re misreading something, Gross is worried both about the value of US sovereign debt being inflated away and, at the same time, about near-recessionary growth in developed countries over the long term.

But slow growth, of course, is anti-inflationary, and Gross even says above that the reason he should have held on to more Treasuries is because expected growth is weaker than he originally thought.

Is that what Gross thinks will happen? If so, then the only rationale that comes to mind for his starting to buy Treasuries again — and for saying he wishes he had more — is that he plans to time the market (and dump them) ahead of that moment.

No. That is NOT the only rationale. I intend to hold my TIPS until maturity. Once one realizes that negative real yields can last a LOT longer than most realize, it isn't at all hard to see what Gross is saying.