Economic Warnings From The Yield Curve

Richard Suttmeier

The yield curve flattened by 101.3 basis points in 2017 as the 2-year yield rose by 68.9 BPs and the 30-Year bond yield fell by 32.4 BPs. The yield on the 2-Year note bottomed at 0.15% in Sept. 2011, while the yield on the 30-Year bond did not bottom until it tested 2.089% in July 2016.

A rising 2-Year yield tracks the hiking of the federal funds rate by the FOMC. The funds rate was cut to 0 – 0.25 on Dec. 16, 2008 and stayed there until Dec. 17, 2015 when it was hiked to 0.25 – 0.50. Subsequent highs were: 0.50 – 0.75 on Dec. 15, 2016, 0.75 – 1.00 on March 16, 2017, 1.00 – 1.25 on June 15, 2017 and 1.25 to 1.50 on Dec. 14, 2017. Three rate hikes are projected in 2018.

What does this mean for markets and the economy in 2018? A flattening yield curve warns that there could be a recession. Wall Street says ‘No’ to that notion as tax cuts take effect and as infrastructure spending begins. An infrastructure bill faces the hurdle of needed 60 ‘yea’ votes in the Senate to pass.

I caution that tax cuts for Main Street will be offset by higher healthcare costs and higher interest charges on rates adjusted higher as the prime rate rises with the federal funds rate. Rates on money market rates will lag, and rates on bank CD’s are locked until maturities.

Comex gold and crude oil ended 2017 with positive weekly charts, adding inflationary pressures to the Main Street list of woes.

Household debts are on the rise and should soon exceed $13 trillion, a new all-time high.

Here’s the weekly chart for the 2-Year U.S. Treasury Yield.

Courtesy of MetaStock Xenith

The 2-Year yield has been rising since holding its 200-week simple moving average or ‘reversion to the mean’ during the week of June 24, 2016 when this average was 0.50%. The weekly chart favors higher yields as the 2-Year yield is above its five-week
modified moving average of 1.776%. A multiyear high for this yield was set at 1.927% on Dec. 27. The 12x3x3 weekly slow stochastic ended 2017 at 95.20 indicating that the rise in this yield may have risen too far too fast. A reading above 80.00 indicates that the rise in yield may have been overdone.

If you are looking for a 2-Year bank CD don’t accept an offer below 2.00%. Any deposit of$250,000 or less will carry the FDIC guarantee that covers insured deposits. There are $7.09 trillion insured deposits in the banking system at the end of the third quarter 2017.

Here’s the weekly chart for the 30-Year U.S. Treasury Bond Yield.

Courtesy of MetaStock Xenith

The 30-Year yield has been below its 200-week simple moving average or ‘reversion to the mean’ since the week of March 24 when this average was 3.05%. The weekly chart favors lower bond yields as 2018 begins with yield below its five-week modified
moving average of 2.782% and below its 200-week SMA of 2.880%. The 12x3x3 weekly slow stochastic ended 2017 at 30.71 declining from 33.04 on Dec. 22.

If you are looking for a 30-year fixed rate mortgage or refinancing plan, you should not settle for a mortgage rate above 4%. Many experts suggest a 15-year mortgage at a lower rate, but I suggest the 30-year as your monthly payments will be much lower.

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