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Posted by on Apr 1, 2014 in Pring Turner Capital Group

The Treasury Yield Curve Starts its Tightening Process

The Treasury Yield Curve Starts its Tightening Process

Martin Pring is the Investment Strategist to the AdvisorShares Pring Turner Business Cycle ETF (DBIZ)—and since 1984, he has published the “Intermarket Review,” a monthly global market report revered among analysts and market technicians. Here, Martin shares his latest technical analysis.

 

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Source: Reuters

 
This chart shows that the ratio between 2- and 20-year treasury yields has broken out to the upside, as this segment of the yield curve has begun its long journey towards inversion. This is a condition where short rates move above longer-term ones which is represented in the chart as a plot above the dashed brown line. The data indicate that previous advances in this spectrum of the yield curve have also been followed by or coincided with primary trend bottoms in short-term interest rates. This spread actually reached its low in 2011, so the March breakout signals the second stage in the move towards a flattening.  This process is the market’s way of reflecting a tightening in the system, which sooner or later will be followed by Fed actions. During recessions the central bank acts pretty quickly when it senses a problem by dropping rates.  On the way up things are a bit different, as it is typically a lagging indicator, which follows the tightening lead triggered by market forces.

The good news is that the initial phase of rising short-term rates is caused by an improvement in business activity and should therefore be welcomed. Only when inflationary conditions get out of hand do rates rise at a pace that is sufficient to cause economic weakness. For instance all of the recessions since 1980 have were preceded by an inversion in this version of the yields curve. The last three recessions were all preceded by a decline in the curve, as long-term yields proved stiffer than their short-term counterparts. The fact that the curve is currently in the early phase of an advance should therefore be regarded as a plus for the health of the economy. Only after a multi-month advance and an actual inversion should we begin to worry about the next economic contraction.

 

 

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