We are very close to a recession: MKM Partners
The U.S. 30-year “long bond” yield has collapsed below the 2010 lows, an ominous sign, in our view. Although some (mistakenly, in our opinion) associate low rates with easy money, we view the collapse in yields across the Treasury term structure as an unambiguous sign of weaker nominal growth expectations. In technical terms, it would appear that a negative velocity shock is under way. Although the term structure is still “positively sloped,” it cannot invert with short rates pinned at zero. Remember, Japan slipped into recession during the second half of 1997, when its 2s-10s spread fell to 175 bps; the U.S. version is now 190 bps (and falling). The Japanese recession occurred when the Asian financial crisis precipitated a negative velocity shock in Japan that went unchecked by the Bank of Japan. Nearly 15 years later, this time related to monetary and credit disturbances in Europe, the U.S. appears to be in the throes of another negative velocity shock that has been captured by collapsing Treasury yields, narrowing TIPS spreads, a compressing term structure of interest rates and widening high yield debt spreads. Although there’s nothing magical about 175 bps—the level to which the term structure sank in Japan before the 1997 recession—we fear that the U.S. could be 15 bps from a recessionary outcome nonetheless. |
