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You check YOUR yield curve, I'll check mine: The Fed vs. Investors

May 21, 2019

We Crunch the Numbers, You Make the Trade.We Crunch the Numbers, You Make the Trade.
We Crunch the Numbers, You Make the Trade.We Crunch the Numbers, You Make the Trade.

 

  • Investors and Fed official study the difference between short and long term rates to get an idea of where the market thinks the economy is headed
  • Both look for any indication that short term rates are exceeding long term rates-called yield curve inversion-a sign that has preceeded every recession since the mid-1970s
  • As the WSJ highlights today, investors and Fed officials are seeing different things right now
  • Fed official tend to compare the yield of very short term rates, those of the 3-month Treasury bills, with the 10-year Treasury note
    • This measure has seen an inversion of rates a number of times amid the recent market turmoil, generally considered to be a worrying sign
  • Investors tend to compare the yield on the 2-year note, a "less" short term yield, with that of the 10-year note
    • This measure has seen no inversions during recent turmoil in the market
  • There are some reasons for this, including the belief that there are interest rate cuts coming
  • 2 year notes are pricing in at least one rate cut over the life of the bond while 3-year bills are not
  • Fed Funds futures show investors are betting there will be at least one rate cut before the end of the year
  • Rate cut chances are being bolstered amid the trade tensions with the potential for slower growth ahead

 

 

 

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Global Top Stock IdeasTOP LONG & TOP SHORT STOCK IDEAS FOR GLOBAL MARKETSMONTHLY TOP IDEAS FROM OUR MULTI-FACTOR QUANTITATIVE MODELS