The Treasury Market Acts Like the Economy is in a Death Spiral, But Wait…

In the past, the Treasury market was terribly wrong about this. In these instances, the 10-year yield had no predictive quality. It was just a stupid move by the market that then self-corrected brutally. The last such idiocy happened in 2016. The good folks who made that move are still ruing the day (13 minutes).

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  63 comments for “THE WOLF STREET REPORT

  1. a reader says:

    The economy is strong. Str-rrrrrr-ong! STRONG!!

  2. Paul says:

    GDP is growing more slowly than the federal debt.
    Subtract the annual increases in private, corporate and federal debt which brings consumption forward but reduces future spending, and the economy is easily seen to be contracting.
    Adjust what is left by real inflation numbers, and the picture gets even worse.
    What do you expect with an average work week of 33 hours, a $500 billion a year current account deficit, a 62% labor participation rate, etc.?

  3. akiddy111 says:

    Thanks wolf. I will go listen to last week’s “Breakfast with Dave” to get the other side of the story.

    But seriously , most of that data trove could have been said on October 2007, including the Government spending and Fed optimism part.

    Also, when the 10 year dropped in 2016 to 1.37%, the Fed Funds rate was zero. Today we have inversion all over the place. Nothing burger ? Maybe, but unusual. Recession or no ? Not clear cut either way as far as i can tell.

    • Wolf Richter says:


      “Also, when the 10 year dropped in 2016 to 1.37%, the Fed Funds rate was zero.” Yes (well close… this was after the first rate hike), but today, unlike in 2016, Treasury investors have another option: short term bills that pay 2.35%. So they don’t need to buy the 10-year maturity to get a little extra yield. They can buy short-term bills and be ahead.

    • Iamafan says:

      The last time the 10Y and the 1Mo inverted (Aug 2006) , we got a recession (actually a crisis). That said, I don’t think the 10Y is telling us anything (prediction). Why some people are buying long term treasuries at these low rates is beyond me. Maybe they have to much “fiat” money to gamble.

      By the way, the EFFR can be as low as you can think of, but the IOER is the “floor”. Not sure the EFFR still means what it used to mean, if anything.

  4. michael says:

    The FED’s double talk reminds me of Ben Bernanke “subprime is contained.” It also seemed like the president was also asking for lower rates.

  5. Rowen says:

    Wait, I thought there was a Chinese Wall between the analytical and investment divisions in a bank?


  6. Let the megaphone pattern on the charts play out. We may have one last run to 3,000 on the S&P this summer before TSHTF.

  7. timbers says:

    So, the question begs:

    Why should savers pay for a Tariff Policy, and how does making savers pay for tariffs make the economy better?

    WTF did Powell do his U-Turn…oh excuse me L-Turn…and become patient – when you just explained that there is no reason to be patient?

    If the economy as you explained, why the patience?

    Why is Powell still in monetary easing mode if there is no need to be?

    And why is that not a U-Turn but an L-Turn?

    Why is Powell a Super Ultra Dove Deluxe?

    • Wolf Richter says:

      “Why is Powell still in monetary easing mode if there is no need to be?”

      What do you mean?

      • Sandu says:

        I think timbers meant: if the economy continues to be in a good shape, as the FED says, why can’t it stick to its plan from last year and keep hiking rates throughout 2019 and 2020?

        • Prairies says:

          Exactly what I have been curious about this year. The commentary is “economy is strong”, while the reaction is “economy is on the brink so lets hold off.”

          In my world actions speak louder than words, and with this basement dwelling interest rate I get the feeling the powers that be are trying to keep the bag sealed long enough to put down a bucket to catch the liquid when this bag rips. Once people see a rate cut I expect it to pour.

  8. Sandu says:

    If everything is overvalued, that would include stocks. If the stock market is overvalued, it would need to start correcting at some point – maybe the less dovish then what the market expected FED stance at the beginning of May + newly announced and imposed tariffs in May were a sufficient trigger to start making people nervous and start selling stocks.

    What happens when people start getting nervous? They start shifting their assets into what they perceive to be safe heavens. Not too many of them: Treasuries and gold.

    So a good part of the big drop in long-term yields might not be just a function of expectations of future rate cuts but also a matter of simple demand-and-supply dynamics.

    Regarding consumer confidence: if personal disposable income has been rising nicely over the last year or so why the significant dip at end of 2018? Could it be that when Joe six-pack watches “smart people” freak out on TV he panics and vice-versa? My bet is that we will see a hit in consumer confidence after the month of May and that there is a larger correlation between significant market moves (either up or down) and consumer sentiment than what most people realize. Lower consumer confidence will lead to even less spending – not that it was very strong anyway during the first 4 months of 2019.

    Plus, we talk all the time here about how much in-debt consumers are. Maybe with all the new disposable income they start paying down some debt (especially if they see people freak out on TV) instead of propping up the economy by consuming more. Maybe some folks also start fearing about their jobs.

    It is well know that unemployment rate is a lagging indicator. If the stock prices don’t keep going up and demand starts slowing, how do CEOs reign in costs so earnings don’t take a large dive: they start cutting cost and fire people.

    Regarding the reassurances we keep receiving from the FED officials that the economy is in a good shape: it’s a confidence game – they will never tell us ahead of time if they see significant downside risks. That only makes things worse. They only start acknowledging things have not been good, after the fact. Plenty of examples in history – See an example here: 2 months later Fannie Mae and Freddie Mac were placed in conservatorship.

    I am not saying that a repeat of the 2016 false prediction of a Treasuries yield curve inversion can’t be repeated. For that to happen I believe the trade wars need to be resolved soon (hard to see the path to that at the moment). Or the FED becomes a lot more accommodating soon – but that might mean we just avoid a recession in the near term but we will still have lower rates.

    As I said before, I rely more on the yield curve inversion (3y-10y) as stronger predictor of recessions if it persists for a longer time frame (at least a few weeks).

    • alex in san jose AKA digital Detroit says:

      Sandu – Most of us swore off of debt completely after the crash.

    • Paulo says:

      Or, you could borrow some money or take some savings and invest in this:

      ” Watches of Switzerland’s successful IPO shows the skyrocketing popularity of luxury watches is not lost on financial markets. The stock debuted Thursday on the London Stock Exchange at an IPO price of 270 pounds (about $341) and rose as much as 17%.

      Its enterprise value is already 5 times what Apollo paid for it in 2012.”

      Nah, no excess or over-valuations.

      • IdahoPotato says:

        Watches are still a thing? I though people ask Siri or Alexa for the time. I thought I was the only human who still wears a watch.

    • Sandu says:

      I meant the 3m-10y yield curve above not the 3y-10y which was has been inverted for a longer time. There was a bit of short scare about 2-3 months ago when the 3m-10y inverted but then the 10y went above the 3m just after a couple of weeks. It has recently inverted again.

    • Wolf Richter says:


      Just to comment on this: “What happens when people start getting nervous? They start shifting their assets into what they perceive to be safe heavens. Not too many of them: Treasuries and gold.”

      Yes, some people will “shift” their assets. Which means they will sell their stocks to buy something else. But for each share that is sold, there is a buyer that puts the exact same amount into the stock market that the seller takes out.

      So there is in effect no shift of capital possible. It’s just selling pressure and buying pressure that changes and that can move price levels.

      But if the stock buyers are selling their Treasuries to obtain the funds to buy stocks, and stock sellers are selling stocks to buy Treasuries, there is no net change in selling pressure either.

      This was demonstrated when Treasury prices rose (and yields fell) even as stock prices soared earlier this year. Buying pressure drove both asset classes up simultaneously.

      In the same manner, selling pressure can drive down both asset classes simultaneously.

      And remember, when the stock market drops a little and $2 trillion in valuation disappears, this $2 trillion in market decline didn’t go anywhere else. It just evaporated. It cannot be used to buy anything else.

      • Sandu says:

        I agree with you Wolf in this respect: if I bought shares worth of $100 on 5/1, sold them for $94 on 5/31 and bought $94 worth of Treasuries is does not mean that $94 was “shifted” into Treasuries. There must have been a buyer who stepped in with the $94 to buy my shares.

        However, unless the overall money supply does not shrink accordingly during this time period, the $6 must find some other place to go, doesn’t it? So it does not really evaporate.

        I think I read somewhere that the global stock market experienced a $5T loss over the last month or so – no small change. Compared to other developed countries, treasuries are still one of the very few government bonds that at least pay some interest. And even for those that pay interest: how many people would buy 10-year Greece bonds at 2.86% vs US 10y at 2.12%? So the flight to safety might be more global and not localized to just to the US.

        • Sandu says:

          I meant “…the money supply DOES shrink…”. Theses uneditable comments:).

        • Wisdom Seeker says:

          Sandu, this is the error Wolf is talking about:

          “the $6 must find some other place to go, doesn’t it? So it does not really evaporate.”

          It does not have to find anywhere else to go. It DOES evaporate. Because it was never really $6, it was simply an asset price.

          If I walk up to you tomorrow and offer to buy your house for $1,000,000 more than you paid for it, no actual dollars are created. But the asset price nevertheless increases by $1,000,000. You will be richer from my $1,000,000, and I will feel richer b/c I have a nice house, but only until I sell and don’t have the $1,000,000 I thought I had…

        • Wolf Richter says:


          The $6 you lost, multiplied by millions across the entire shares outstanding, just evaporated. This value simply disappears. It goes into no-one’s pocket. It’s the marginal sale that sets the price. All other investors that held their shares and didn’t sell also saw the same evaporation of value. The opposite is true when prices rise. It “creates” value. No one complains about that :-]

          If someone is short the shares, that’s a separate transaction, and different deal, going in the opposite direction. Your $6, multiplied by millions, still disappears. But in a separate transaction with borrowed shares, some other dude made some money and this created some value.

        • Sandu says:

          At an aggregate level, to my knowledge there can really be only 2 main sources that lead to assets and/or consumer prices inflation:

          a. An increase on the monetary base: i.e. an increase in the quantity of money – M2 or M3 – depending which measure one wants to look at and/or an increase in its velocity

          b. Creation of credit – through the fractional-reserve system, banks can create money out of thin-air when they issue credit – i.e. they can lend money w/o that money having to be fully backed up by deposits.

          Both of these increase the purchasing power of all players in the economy.

          For total assets value, as an aggregate, to go down the combined value of all the money that backed up those assets has to go down:

          1. Typically the monetary base from item a). probably does not really disappear anywhere – for e.g. banknotes taken out of circulation get replaced. If the velocity decreases, that does lead to a decrease in the money supply.

          2. Regarding the credit creation: if a bank issues me a credit and, if for whatever reason, I can’t repay that credit in full, then the difference between the original credit and what I can repay does indeed disappear. And indeed the value of that asset for the bank (i.e. the credit issued to me) is not any longer what the bank thought it was at the beginning.

          If we think that, again as an aggregate, more of the latter occurs then indeed a drop in the global market capitalization does indeed mostly disappear, and we are on the same page:). More likely, a combination of all of these occurs.

        • Wisdom Seeker says:

          Sandu, no:

          1) This is entirely wrong: “Both of these increase the purchasing power of all players in the economy.” – They only increase the purchasing power of those receiving the newly created money or credit. This is partly why credit expansions (as we have had in the US since ~1982 or so) exacerbate wealth inequality.

          2) This also is wrong: “For total assets value, as an aggregate, to go down the combined value of all the money that backed up those assets has to go down”. All that has to happen for asset values to drop is for people to change their preferences such that they prefer holding onto their cash rather than those assets. It’s just a matter of enough people realizing that “Asset X is not worth these prices”. We know this (for instance) because last October-December, the stock market dropped by a large percentage and yet there was no drop in the money supply and debt outstanding continued to increase.

          P.S. The way that credit/debt money contracts is AFTER the asset values drop, when the debtor becomes unwilling or unable to make the payments to the creditor.

        • Sandu says:

          I realize now the flaw in my logic: when I referred to the $5T that was an estimated drop in the total market cap, not the dollar amount of outflows from equity markets. The $ of outflows would be much smaller and the I totally agree that most of that $5T is indeed just value that disappears.

          Thank you Wolf and Wisdom Seeker for your inputs and corrections.

  9. CaptHank says:

    Banks barrow on the short term and loan on the long term. NOWAY they will loan in in this environment. Look for them to tighten up lending, and on an economy that is driven 70% by consumption!!!. Hello depression.

    • A Citizen says:


      Maybe you need a timeout.

    • Paulo says:

      Yeah, the rates have to either change or lending slows. They certainly won’t lend at a perceived loss. I have only encountered this once and that was in the late ’70s dealing with a local credit union. I went in the negotiate a house mortgage…1st home. I had 20% for a down payment. They said, “Sorry, we have already committed for our years mortgage investments.” That was my intro to the Royal Bank. (bandits…but they gave me a mortgage). In five years the rates went to almost 20%. Scary times.

  10. David Hall says:

    Part of the yield curve inverted in December and has been inverted since.

    The Fed warned about subprime corporate debt, leveraged loans, covenant light corporate debt.

    Inflation adjusted housing price indexes are above long term trend. Prices of luxury homes are rumored to be in decline.

    • sc7 says:

      Luxury homes are definitely in decline. Low mortgage rates are catching the last few suckers before the rest of the housing market goes into decline.

  11. Bob Johnson says:

    No one has a crystal ball, but data is always better than hyperbole. Thank you for using data.

  12. breamrod says:

    your right. If you can trust the data. Look at how the way to measure inflation has changed since 1990. The U.S. would have had negative GDP if measured the old way. I’m afraid we have a three card monte government now. But I agree with Wolf that the ten year is going to snap back hard!

  13. Michael Engel says:

    1) $SPX, monthly, linear, with x3 parallel lines for SPX GPS :
    – Line #1, the top line : from Apr 2010(H) to Dec 2014(H).
    – Line #2, the half line : from July 2010(L) to Oct 2014(L).
    – Line #3, the support line : a parallel line from Oct 2011(L).
    That’s it.
    Line #1, the top line, will be tested once or twice, in June July. If the market fail to reach & breach May(H), the stock market will start to dive.
    2) July earning reports are likely to disappoint.
    Inflation expectations and tariff filled warehouses .
    When warehouses are full, trains and trucks run half empty,
    new orders disappoint and excess inventory purge.
    The question is what will happen in the second half of 2019.
    If the GDP dip a little that’s ok. Market correction will be followed by a new upthrust, that will last for several years.
    GDP will rise, after the dip, as result of new supply lines, US China decoupling and higher wages. In the next few years the economy will boom.
    ==> Phase III of the uptrend since March 2009(L) will start and inflation will rise.

  14. Whirled Peas says:

    Oh how I long for the day when we had free markets and interest rates were set by that market.
    Oh how I long for the day when we had free markets and recessions would periodically correct bad capital allocations.
    Oh how I long for the day when Joseph Schumpeter’s philosophy would be considered just common sense.
    Oh how I long for the day when people wake up and realize that borrowed money must be paid back either through future austerity or inflation.
    Oh how I long for the day when people realize that all this debt, public and private, will damage the economy for may years.

    • Sandu says:

      Everything goes back to the need for sound money. Clearly explained in the first 7 chapters of this book:

      Maybe one the best books in economics and everything that flows from it. It should be used as a required reading in business schools or any school that wants to open kids’ eyes about what happens around them. It maybe too late and too complicated for us to see a return to that kind of world. New generations should know though that another path is possible.

      And sound money does not have to be bitcoin. Those first 7 chapters hardly talk about it. Spoiler alert: it’s about gold.

      • RD Blakeslee says:

        “New generations should know though that another path is possible.”

        How can they be taught, in the face of an avalanche of prevailing teaching in favor of fiat money? Or, more realistically, their absence of learning about anything financial?

        It is a fact: Ever since Nixon closed the gold window, fiat “wealth” has moved to the increasingly to the wealthy, measured by any gauge.

        Imprisoned in ignorance.

        • Sandu says:

          It’s a small step – but it can start with each one us. We never know where that leads and at least we do our duty.

          My son is going for an Ivy school summer program this summer on politics and economics. He is reading the book now. I’d like him to have a more rounded education.

      • A Citizen says:

        “And sound money does not have to be bitcoin.”

        Bitcoin will never be “sound money,” by definition. Crypto-mavens will gnash teeth and tear off their clothes, but there it is.

    • Gershon says:

      We will not have honest markets or sound money until we end the Fed.

  15. Michael Engel says:

    The SPX chart is not a megaphone.
    There are x3 throwovers above the top line, the resistance line, from
    Apr 2010(H) to Dec 2014(H) :
    – The strongest throwover is Jan 2018.
    – Sep 2018 high is the middle one.
    – May 2019 is a thud !

    • Bet says:

      Spx monthly chart looks like a double top on big negative divergences with the lower Monthly bollinger band racing up to meet price Not a bullish set up. We shall see

  16. Setarcos says:

    Consumers are obviously doing quite well and govt spending is juiced this year as a continuing result of appropriations from 2017-2018 … but what is in the pipeline for govt spending in 2020? Not sure, but that is something to investigate.

  17. Wolf’s prescient, Wall St is all in on lower rates with hedged bets. Is it different this time? In 16′ gold prices soared, ostensibly on the notion of lower rates, while in this cycle, not at all. Is the link between the global monetary system and NYSE going to maintain? EFFR went from 0 – 60 in two years, which brought money in and propped up the dollar. WH policy calls for lower rates and a lower dollar.

  18. Bobber says:

    The low 10-year rates could be a response to extreme overvaluation in the stock market. When the risk/reward turns negative in stocks, cash is a good alternative. A bond paying 2% is even better. Note, the 10-year rate really started dropping when stocks made their steady climb in 2019. Also, the trade war began to heat up during that same period, putting further pressure on stocks.

    People are getting jittery about the stock market, and so bonds are getting elevated.

    A stock market route takes several years to unfold, so that may be why the 10-year has dropped a lot more than the T-bill.

    Even if the economy would otherwise do OK on its own, a stock market drop could trigger a recession. This is attributable to the valuation problem the Fed created.

    • John Taylor says:

      If investors are jittery, I’d expect them to go to shorter term treasuries. That’s what I did in a few batches … I have CDs paying approx 2.4% which mature between June and November this year.

      Buying longer-term treasuries at close to 2% is a bet that interest rates will drop, not an attempt to lock in those fabulous rates for 10 years.

      In my opinion, Powell is not being dovish yet, and wall street is worried about where future buying pressure will come from without a dovish fed. Massive stock buybacks this year are providing buying pressure for now (these large purchases happen incrementally over several months).

      However, the market is fragile and a repeat of last year’s drop could easily happen. There is no strong floor of buying support … the system of market-maker institutions stabilizing the price doesn’t exist post Dodd-Frank. High frequency traders give the illusion of liquidity by raising volume, but they aren’t designed to step in and support falling prices so they don’t provide any real liquidity … in fact, many are momentum based and will amplify a swing rather than stabilize it.

      In short, a crash is not imminent as momentum is weakly upward, but once it turns it can turn fast. If it corrects significantly, you might see good buying opportunities (perhaps in junk bonds if yields explode?). That’s why I’m more comfortable waiting on the sidelines with a guaranteed short-term 2.4% for now rather than risking for more. I can make this return for a year or two and not feel bad about it in this environment.

  19. Michael Engel says:

    1) SPX daily closed the March 8/ 11 gap.
    SPX , either from 6/03(L), or below, on line #2 vicinity , will move higher to form SPX/ SPLY, before the downtrend start.
    It’s possible that SPX will osc in a trading range in direction of the monthly support line, line #3, for many months, or even beyond, pumping musscles.
    2) GOOGL & FB uppercut was an expected outcome since the 2016 election. It will squeeze the top Pareto chart. The god of money will be humbled
    The invincible top 0.001%, the wealthiest people in US will not move to a tent city. Elizabeth Fangs from Ma, will dance with Trump !
    3) 5% tariff on Mexico is a good thing. Tariff will not rise higher to 25%.
    Fx flex US & Mexico. Imported goods cost will not change change by much.
    4) SPX CEOs, who spent a decade on buy back in a change of behavior, will increase CAPEX.
    5) Real leaders bend the will of partners & associates to get results. Prolong debates don’t work. Those who are not able to adapt, showing their real hostile and ugly face, must be phased out (Guy Hands UK hedge fund, on Bloomberg)

  20. Iamafan says:

    Wow what a great report. I happen to agree with Wolf and I moved my regular 2Y investments to FRNs. If Wolf is right, then I make more than 2.4% since I earn a spread over the 13 week high rate. The rest are all in short term 4 week to 6 months. Nothing longer for now. My #1 investment rule is I get to sleep at night without worrying.

  21. Mean Chicken says:

    The shenanigans are deplorable!

  22. SocalJim says:

    Say what you will, but I flew into Boston to get a rental ready for my new tenants that will be moving in on the 16th. I need a carpenter and a plumber. I call and call and no one even calls me back. They don’t want more work. Today, I am doing some of the work myself because everyone is so busy I can not even get a return call. WTF … you call this a slow economy? I think it is just a stock market pissy because the tariffs will erode corporate profit margins.

    • JZ says:

      This is the time to go ALL-IN and MOAR!

    • Paulo says:

      It isn’t that it is a slow economy, it is an economy that is based mostly on debt. That is the problem. When the debt has to be paid one day with devalued dollars we’ll see how robust the economy really is? I would imagine many new home buyers will never pay them off and will always remain in debt. Everything is predicated on increasing in value, and the only hope is for these values to increase, always. In real terms, are they really?

      I do agree with you that rentals are a wise investment. However, it must be beyond frustrating looking for contractors in a rush situation. Good luck!

      • IdahoPotato says:

        The median down payment on a house is 13% for buyers overall, and 7% for first-time buyers, according to the National Association of Realtors’ 2018 Profile of Home Buyers and Sellers.

        Of the buyers who took out a mortgage, 55% made a down payment worth 6% or less of their home value. That number is even higher for first-time homebuyers, 72% of whom made a down payment of 6% or less (as of December of 2018).

        If the job market goes south, imagine the consequences.

  23. WES says:

    More and more it seems like the Fed owned by the banks is operating in its own little world of financially engineering Zombies high up on Wall Street completely removed from the world of Main Street below them.

    Maybe Wall Street needs to stop growing or shrink so Main Street can grow?

    Trying to understand the meaning of central bank controlled number entrails may have about as much usefulness as rearranging the chairs on the deck of the Titanic!

    There is a disconnect in there somewhere.

  24. Iamafan says:

    To those loving the TLT. Remember (not too long ago) when the interest rates started rising, the TLT lost about 13%. End your chart about 11/02/18 and you’ll see it.

    If you look at the TLT’s portfolio, they are loaded with bonds returning at least 2.5%> maturing around 2045s or so. So as they have to buy NEW bonds (with lower yields) to fill up the portfolio, the dividend may decrease.

    You can’t possibly know what will happen. But the yield on the 4 week is at least 2.3x% making it very appealing. There is very little term risk, too.

  25. Gershon says:

    Ten years of Fed “emergency measures” and a supposedly robust economic recovery, yet Powell gone from “hikes on automatic pilot” to blind panic and preparing to slash interest rates as the charade of our “economic expansion” fueled by debt and limitless cheap Yellen Bux lavished on Wall Street grifters is about to be exposed for all to see.

  26. Gershon says:

    Gold is up over $45 the last two trading days as the flight to quality – and out of the Fed’s doomed Ponzi markets and asset bubbles – looks set to accelerate.

  27. KiwiinCanada says:

    I wonder if the 2.5 % short rates are the anomaly which is causing this reactive shudder through the system. A zero based world is puzzled by this. Everywhere one looks for profit the short rate rears its head and curtails the exuberance. One needs to borrow for stock buybacks, sorry 2.5%. One needs to rollover US dollar loans and your revenue is all in another currency, sorry 2.5%. You need funds but Treasury Direct is sucking everything up at 2.5%.

    I wonder how much pressure is required in all its myriad forms on that institution responsible for this anomaly. Recession pending, yes. Inflation to low, yes. Political fortunes depend on it, yes. Financial and Real estate markets wobbling because of it, yes. I am sure this does not end the narrative supporting the end of this anomaly.

    Ah, I so much need the return of the days when I could borrow at close to zero percent. After all I am a junky and it’s not my fault.

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