Re: Inverted yield curves - not a big deal?

["ÁÎ×Ó¹â HenryC.K.Liu ¹ù¤l¥ú" <hliu@xxxxxxxxxxxxxx>]

It may not be a big deal to economists, but it is certainly a big deal on Wall
Street.

The bond market was thrown into chaos, with rumors of LTCM scale losses to banks,
brokerage houses and hedge funds on the wrong side of the Treasury moves. The stress
to the system is extraordinary, some are using words such as "unprecedented".

The NY Fed issued denials in early afternoon on the day the Fed and the Treasury
made their separte moves (Febuary 3rd), of calling a LTCM type special session to
assess the damage to the market.

Wall Street firms regularly short longterm government securities to hedge their
large portfolios of mortgages and corporate bonds.  The current market is deadly for
these positions. Goldman shares dropped 6.3% on the same day.

Historical data suggest the it usually takes 6 month to absorb structural changes of
the yield curves, and usually with much pain.
The deal can be very big by summer unless the Treasury and the Fed put their heads
together.

Henry C.K. Liu

Greg Nowell wrote:

> Speaking of Prof. Davidson's assertions that events are not ergodic--when is an
> inverted curve not inverted?  When supply considerations and hoarding at one end
> of the curve in one asset category causes a "distortion" not generally
> followeld.
>
> During hte Asian crisis, foreign investors piled into US securities and the U.S.
> treasury went down to 4.75% and the 0 point 30 year home mortgage followed down
> to about 6.5-6.625%.
>
> Today, the 30 year Treasury, in a much calmer environment, is nose-diving on
> speculation about its scarcity.  The 30 year zero point home mortgage is at
> 8.25%.
>
> What this suggests is that the inverted yield curve in govt secs is not
> indicative of major yield curve realignments in general markets and taht it is
> therefore not an indicator of crisis.  This lends plausibility to the theory
> that there's a lot of speculative hoarding of 30 year notes so that p[rices on
> the margin are rising.  -gn.
>
> Clifford Poirot wrote:
>
> > The following article appeared in today's NYT.
> > http://www.nytimes.com/library/financial/fed/020100fed-place.html
> >
> > In the event the link does not work, the article states that the efforts by
> > the Treasury to buy back debt has predictably, pushed long term rates down.
> > At the same time, the Fed is pushing short term rates up. Predictably, the
> > yield curve is now inverted, and this may worsen over time. A major change
> > in the markets also aggravates the situation. Most loans are now created in
> > the capital markets by issuance of bonds, rather than through the banking
> > system.
> >
> > I am sure most of us are familiar with Kaldor's work "The Scourge of
> > Monetarism" where he pointed out that not only was Monetarism bad theory and
> > bad policy, but that it could not even be executed due to the inability of
> > central banks to meet M2 targets. It seems that the process of
> > disintermediation is actually weakening Central Bank control further.
> >
> > Have we now reached the point where the Fed cannot only not meet M2 targets,
> > but can no longer hit an interest rate target?
>
> --
> Gregory P. Nowell
> Associate Professor
> Department of Political Science, Milne 100
> State University of New York
> 135 Western Ave.
> Albany, New York 12222
>
> Fax 518-442-5298