Next Fin. Crisis?
It's been more than 6 years since the last major financial crisis occured in 2008. If we assume financial crisis come out almost perodically in every 8 - 10 years then I think it's time to start thinking whether we are close to the next one.
10Y US treasury notes have always been preferred investment tool for non-risk takers regardless to the financial environment. But what about 2Yr treasury bonds? Can it tell us tell of something different?
So I looked at how the spread between 10Y and 2Y notes changes. I took the difference of 10Y and 2Y note yields (drawn in blue line) and looked how it changes with time. I marked with green circles where the spread is equal to 0 (10Y yield = 2Y yield) First 1990, second (little one) 1998, third 2000, fourth 2007. I'm sure you're very familiar with these years:) Before every major crisis 2Y note yield became equal to 10Y note yield. Why? Because smart money managers see the uncertainty and the approaching crisis in the market and move their money from short term bonds.
Up to this point maybe that was what you heard before. But can we predict the next crisis time? So when I drew 2Y note yield (red line), I noticed the 2Y note yields at the time of crisis are decreasing linear starting with 9,55% in 1990 and ending with 4,92% in 2007. (the green descending trend line) This confirms today's ongoing deflationary markets in all over the world. If we assume the trend will continue as it is, 3 - 3,5% would be most probably the next 2Y treasury note yield at the time of the next financial crisis. If we look at the FED rate history, we see the fund rate is pretty similar to the 2Y note yield. So did you recall the FED fund rate projections for the next years?? Most of the FED members project the fund rate will be around 3,5% at the end of 2017. Bingo! And also in 2017 we will have had 9 years after the last financial crisis. Be careful in 2017 if the spread of 10Y and 2Y notes yields close to each other..
federalreserve.gov/monetarypolicy/fomcminutes20141217ep.htm
10Y US treasury notes have always been preferred investment tool for non-risk takers regardless to the financial environment. But what about 2Yr treasury bonds? Can it tell us tell of something different?
So I looked at how the spread between 10Y and 2Y notes changes. I took the difference of 10Y and 2Y note yields (drawn in blue line) and looked how it changes with time. I marked with green circles where the spread is equal to 0 (10Y yield = 2Y yield) First 1990, second (little one) 1998, third 2000, fourth 2007. I'm sure you're very familiar with these years:) Before every major crisis 2Y note yield became equal to 10Y note yield. Why? Because smart money managers see the uncertainty and the approaching crisis in the market and move their money from short term bonds.
Up to this point maybe that was what you heard before. But can we predict the next crisis time? So when I drew 2Y note yield (red line), I noticed the 2Y note yields at the time of crisis are decreasing linear starting with 9,55% in 1990 and ending with 4,92% in 2007. (the green descending trend line) This confirms today's ongoing deflationary markets in all over the world. If we assume the trend will continue as it is, 3 - 3,5% would be most probably the next 2Y treasury note yield at the time of the next financial crisis. If we look at the FED rate history, we see the fund rate is pretty similar to the 2Y note yield. So did you recall the FED fund rate projections for the next years?? Most of the FED members project the fund rate will be around 3,5% at the end of 2017. Bingo! And also in 2017 we will have had 9 years after the last financial crisis. Be careful in 2017 if the spread of 10Y and 2Y notes yields close to each other..
federalreserve.gov/monetarypolicy/fomcminutes20141217ep.htm
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