Recession Warning from the 5s – 30s Curve

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Heading for an ominous 2007 inverted U.S. Treasuries curve? Federal Reserve hiking rates to save face into secular headwinds?

Breaking: *US Treasury Bond 5Y-30Y CURVE FLATTENS, APPROACHES 2017 LOW, POST CRISIS LOWS – Bloomberg

If we’ve learned just one thing after 30 years on Wall street, Credit Markets Lead Equities.  The smart money is in the much larger credit (bond) markets, equities routinely follow, see below.

U.S. Treasury Bonds*

30 Year: 3.06%
5 Year: 2.05%

*Only 1% more yield for an extra 25 year investment, that’s one FLAT curve.

Spread Between 5 Year and 30 Year Bond Yields


Why should you care?  Since the year 1900 nearly every recession was proceeded by a very flat to inverted 5s – 30s curve.  This curve is the great recession indicator.   Notice how flat (inverted) this 5s-30s curve was just prior to the 2008-9 Lehman triggered, recession.  Equities couldn’t see the crisis coming but the long end of the Treasury curve did.  The U.S. Treasury curve should be steepening into an economic growth cycle, not flattening (as we are above). 

U.S. Treasury 5s – 30s Curve Prior to Recessions

Yield Spread between the 5 year and 30 Year Treasury Bond

2008-9:  15bps (October 2007)
2001-2: -58bps (April 2000)
1991-2: -10bps (May 1990)
1981-2:  -30bps (June 1980)

Ahead of every major recession since 1950 the 5s – 30s U.S. Treasury curve has flattened five to 20 months BEFORE the economic downturns.  Since 2011, the 5s – 30s yield spread has moved from 300bps to 100bps, fierce flattening.  During economic downturns U.S. Treasuries offer investors a flight to quality, the net result bond prices surge.  Heading into economic contractions bond buyers deploy cash on the long end (30 year bonds) of the yield curve.

Today, while the front end of the U.S. Treasury curve is in sell off mode, the long end is NOT.   Bond bulls have migrated out in colossal fashion into the 30 year bond meadow.  They’re hanging out there in size, it’s one large possy.

What’s Going On?

A perfect storm of divergence is taking place.  Amid “secular stagnation” and sustainable economic growth concerns, the Federal Reserve hiked interest rates only once in the last eight Obama years.  Today, they’re (the Fed, recent Speeches Dudley, Williams, Brainard) signaling their second hike since the election of President Donald Trump?  Why do they have so much confidence in the new President?  Long term U.S. Treasuries do NOT, they think reflation estimates are over done.

Fed Fund Furfures for a March Rate Hike

Today: 94%
One Week Ago: 40%
Three Weeks Ago: 26%

Bloomberg data

The Bottom Line?

Although the Fed is desperate to play catch up with rate hikes, the long end of the curve (long term bond buyers) are NOT sold on a sustainable path of rate hikes as well as the much hyped relation trade.  Stubborn secular forces are overpowering the Fed and Trump’s agenda for now.

There’s a deep hidden signal here, join us at the Bear Traps report, click on this link.


Join our Larry McDonald on CNBC’s Trading Nation, this Wednesday at 2:20pm

Don’t miss our next trade idea. Get on the Bear Traps Report Today, click here






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