Business | Markets
Bond market signals imminent US slump
Signals from the Treasury bond market suggest a government stimulus plan and last week's massive Fed interest-rate cut are too late to prevent a recession.
- Reuters
- Published: 00:22 January 29, 2008
New York: Signals from the Treasury bond market suggest a government stimulus plan and last week's massive Fed interest-rate cut are too late to prevent a recession. The economy may have already crossed the line.
As yields on short-term Treasuries fall relative to yields on longer-term bonds, the yield curve has assumed a shape that's similar to those seen during past recessions. Indeed, when current yields are graphed, the curve is still only about half as steep as the slope that coincided with the most recent economic recoveries.
Adjustment
This steepening is often a necessary precondition to bail out a troubled banking industry. Crucially, analysts say, the process must bring about a similar adjustment in money markets that will provide cheap short-term financing for longer-term, higher-yield investments, the bread and butter of the financial sector.
Until the Treasury yield curve steepens sufficiently, analysts say, the Federal Reserve may have to reduce borrowing costs further, adding to the sharp, emergency cut in the benchmark short-term target rate announced on Tuesday.
High strain
"We're not at that point where we are seeing a cycle turn and where you can forecast an end to a recession and when the Fed's monetary policy is complete," said Francis Mustaro, managing director, head of investment-grade fixed income at J.W. Seligman in New York.
By several measures, the adjustments necessary to allow financial markets to function smoothly have not taken place yet. That partly reflects the fallout from last year's debacle in the subprime sector for risky mortgages.
The "TED spread," a beacon of financial market health, still shows high levels of strain, though it is down considerably from last year's peaks. The TED, or Treasury-Eurodollar, spread measures the difference between three-month yields on "safe-haven" Treasury bills and the comparable London interbank offered rate, or Libor, a benchmark for interest on loans between banks.
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