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JPMorgan Flags Worsening In ‘One Of The Most Important Market Indicators’

"...similar to 2018, rate markets are sending warning signs".

"...similar to 2018, rate markets are sending warning signs".
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3 comments on “JPMorgan Flags Worsening In ‘One Of The Most Important Market Indicators’

  1. This indicator sounds similar to the “near term forward spread” (spread between current 3 mo TBL yield and 18 mo forward of 3 mo TBL yield).

    In late 2018, NY Fed economists published a study showing that the predictive value of yield curve inversions (e.g. 3 mo – 10 yr) was almost all in the near term portion, with the medium and long part of the curve providing little to no incremental information. The study concluded that the near term forward spread was the best predictor of recessions.

    At the time, the NTFS was positive so the message was to not fear the inverting yield curve. That message was widely picked up by pundits to argue that, despite the yield curve inversion, it is “different this time”.

    By spring 2019, the NTFS went negative.

    Oddly, the pundits were silent on the NTFS inversion. Maybe it got play on FinTwit, but I don’t follow Twitter much. The mainstream commentators ignored it.

    The arguments for why yield curve inversions don’t matter at all based on factors pushing down the long end of the curve. ECB negative rates, Basel regulations, etc. The concept, which I don’t really buy, is that those factors are new and irrelevant to recession probability, ergo yield curve investing no longer matter.

    Those long end arguments don’t apply to the near term forward spread. That spread reflects the market’s assessment of economic conditions in 18 months, with a negative spread implying that the Fed or markets will push very short term rates lower, which in turn implies economic weakness sufficient to cause such a move.

    The NTFS went back positive in fall 2019.

    Last time I checked, it is now negative again. I think it turned negative about a month ago.

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