World by chartsBloomberg announced today that the difference between the 30-year bond yield and the 2-year bond yield hit a high not seen in 30 years (about 4%). Why this might be true, I think it’s both misleading and rather uninformative.
As you can see from the graph below, which shows the difference between the 30-year low and the 2-year low, the spread was above 3.5% in October 1992, just prior to Bill Clinton getting elected with the motto: “it’s the economy, stupid”. Notice the nice build-up before that.
Why is that not surprising? The 2-year bond is essentially controlled by the Federal Reserve through its Fed funds rate. The long bond reflects the credit-worthiness of the US. When the economy stalls, the Fed dutifully lowers interest rates to “stimulate” consumption, the government spends more, and everyone gets worried about a chance of outright default or devaluation.
Here’s the chart for bond yields for the 3-month, 2-year, 5-year, 10-year, and 30-year bonds. (It is missing some data points because the 30-year bond was discontinued for a few years.) As Peter Warburton pointed out in his book, “Debt and Delusion,” during good times there is a convergence of bond yields, while the spread widens during bad times.
Links:
Market folly on curve steepeners
Books:
Debt and Delusion: Central Bank Follies that Threaten Economic Disaster (Deluxe Edition)
Manias, Panics, and Crashes: A History of Financial Crises (Wiley Investment Classics)
This Time is Different: Eight Centuries of Financial Folly
Series of interest:
