Last week's interest rate data ended the inversion, just barely. We'll see if it sticks, but in theory that's supposed to be a positive sign for future economic growth (because it ends the negative signal that inversion was supposedly giving us).
I added the 10yr TIPS rate to the chart (Treasury Inflation Protected Securities), so we could start watching the weekly spread between that and the 10yr note (see dotted arrows); that difference is the bond market's opinion of future inflation, which isn't going anywhere but sideways so far. That's good news, too, because it's a sign that doomsday is still eluding us, as it has been for decades.
Click to enlarge: [revised to show TIPS spread]
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End note:
This chart is now a good enough one-stop source for the weekly interest rate info I like to track. It's also close enough to the threshold of "too much information" so I'll stop adding things.
Despite the "too much information" rule, it would be nice if you labeled the black, dash-dotted lines indicating the bond market's inflation estimate with the numeric difference in the rates.
Posted by: D. F. Linton | 14 June 2007 at 12:13
Well, Steve, most of the news for the month has been more than positive. Good for the tax revenue. Good for the economy. Good as a discussion point next year.
Posted by: Counter Revolutionary | 14 June 2007 at 13:11
D.F.:
Good idea; I should have thought of that. Chart is now revised.
Posted by: Steve | 15 June 2007 at 18:31
Steve,
Do you know if the TIPS yield curve followed the nominal curve into inversion and back?
Posted by: D. F. Linton | 20 June 2007 at 15:25
D.F.:
Sorry, I might not understand the question. The 10yr TIPS yield curve is the same shape as the 10yr nominal curve; i.e., the market's inflation perception has remained steady. That's the main point. (Not that the market always gets it right, by the way.)
Posted by: Steve | 21 June 2007 at 09:32
Steve,
Sorry I was so unclear. There is a range of TIP maturities, isnt' there? Nothing as short as money market, but one year and up. It would seem to me that, since TIPS don't have an inflation premiumn built in that their yield vs maturity curve would reflect the real interest rate time preference.
On your current chart, using the difference in ten year rates you get a 2.4% rate. Isn't that really an estimate of the average inflation expected over 10 years. It seems entirely possible that the market estimate for the inflation rate would not be at all smooth so that the difference in 1 - and 5-year treasuries and TIPS would not have the same implicit inflation estimate. That is the market might say 3% for the first 5 years and 2% thereafter or some other set of rates that are equivalent to 2.4% compounded. If so then part of the nominal yield curve's inflection might represent uneven inflation estimates.
Posted by: D. F. Linton | 21 June 2007 at 11:52
D.F.:
Now I get it. I did a quick check on the March 2 rates across the 5-, 7-, 10- and 20yr inflation indexed bonds (under constant maturity) at this page: http://tinyurl.com/3fdxq
...and it was flat, but not inverted. I'm just watching the 10-yr, but someone might want to go back in the time series and check the rest of them for any inversion that might have taken place.
Posted by: Steve | 22 June 2007 at 16:06