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发帖数: 8367 | 1 Bonds Showing 60% Chance of Recession With Bernanke Behind Curve for BofA
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By Liz Capo McCormick - Oct 10, 2011 11:09 PM CT
Oct. 10 (Bloomberg) -- Scott Brown, chief economist at Raymond James &
Associates Inc., talks about the outlook for the U.S. economy. Brown also
discusses the U.S. labor market. He speaks with Mark Crumpton on Bloomberg
Television's "Bottom Line." (Source: Bloomberg)
The bond market indicator that has predicted every U.S. recession since 1970
shows that the economy has about a 60 percent chance of contracting within
12 months.
The so-called Treasury yield curve, adjusted for distortions caused by the
Federal Reserve’s record low zero to 0.25 percent target interest rate for
overnight loans between banks, shows that two-year notes yield 20 basis
points, or 0.20 percentage point, less than five-year notes, according to
Bank of America Corp. research. The unadjusted gap of 79 basis points at the
end of last week indicates the chance of recession at about 15 percent.
Short-term rates have been higher than longer-term yields, or inverted,
before each of the seven recessions since 1970. A contraction would make it
harder for U.S. President Barack Obama to reduce unemployment, which has
held at or above 9 percent every month except two since May 2009, including
a reading of 9.1 percent in September. It may also help bolster Treasuries
and keep yields near all-time lows.
“The adjusted curve is giving a powerful signal for an upcoming U.S.
recession,” said Ruslan Bikbov, a fixed-income strategist in New York at
Bank of America, one of the 22 primary dealers of U.S. government securities
that trade with the Fed. “If that happens, the Fed’s target rate could
remain near zero beyond 2014,” more than a year longer than the central
bank has indicated, he said in an interview on Oct. 3.
‘Close to Faltering’
Bank of America’s research is sending the same message as the Economic
Cycle Research Institute and Bill Gross, manager of the world’s biggest
bond fund, which say the U.S. may be headed into a decline. Fed Chairman Ben
S. Bernanke said last week in testimony to Congress that the central bank
can take further steps to sustain a recovery that’s “close to faltering”
after almost three-years of near-zero interest rates and $2.35 trillion of
bond purchases.
The Organization for Economic Cooperation and Development cut its forecasts
for the U.S. last month, saying the $15 trillion economy likely grew 1.1
percent in the third quarter and will expand just 0.4 percent in the fourth.
Data last week showed some signs of strength, damping the appeal of
government debt. The Institute for Supply Management’s factory index
climbed to 51.6 last month from 50.6 in August, the Tempe, Arizona-based
group said Oct. 3. A level of 50 is the dividing line between growth and
contraction. The median forecast of 82 economists surveyed by Bloomberg News
projected a drop to 50.5.
Yields Rise
The yield on the benchmark 10-year Treasury rose 16 basis points last week
to 2.08 percent, the biggest gain since it increased 32 basis points in the
period ended July 1. The yield is up from 1.6714 percent on Sept. 23, the
lowest since at least 1953. The two-year note yield ended last week at 0.29
percent, and the five-year security’s at 1.08 percent.
Ten-year notes yielded 2.14 percent today as of 12:34 p.m. in Tokyo, while
two-year rates were 0.30 percent and five-year notes yielded 1.13 percent.
Yields on five-year Treasuries exceed two-year notes by 83 basis points.
While that is above the low this year of 58 on Sept. 22, the gap has shrunk
from a high of 156 on Feb. 10.
The difference would be even narrower if not for the fact that interest
rates can’t fall below zero, the current low absolute level of yields and
the relatively high volatility in bond markets, according to Bank of America
. The bank’s forecasting model removes these conditions, allowing it to
better compare the current yield curve with that of past periods of slow
economic growth.
BofA Outlook
Bank of America sees 10-year note yields at 2.3 percent by year-end, and two
-year yields at 0.2 percent, according to data compiled by Bloomberg.
“The yield curve wouldn’t really invert now due to technical reasons,
mainly as most banks’ models don’t allow projections of interest rates in
the future to be zero or below,” said London-based Moorad Choudhry, head of
business treasury, global banking and markets at Royal Bank of Scotland
Group Plc in an interview on Oct. 4. “These are special circumstances, with
the Fed’s target rate at zero.”
The Fed cut its benchmark rate to near zero in December 2008 after a housing
boom turned into a subprime-mortgage bust, driving Lehman Brothers Holdings
Inc. into bankruptcy three months earlier and freezing global credit
markets. The economy slipped into a recession at that time that lasted 18
months before a recovery began.
Another Recession?
Goldman Sachs Group Inc., another primary dealer, puts the odds of another
recession at 40 percent, the firm’s economists wrote in an Oct. 3 report.
Goldman’s fixed-income strategists reduced their year-end 10-year Treasury
yield forecast to 2.7 percent from 3.1 percent.
JPMorgan Chase & Co. economists said in an Oct. 7 report that they see “a
soft growth picture, but one that is not falling into recession at the
moment.” The firm, also a primary dealer, forecasts the 10-year note yield
will end the year at 2.25 percent.
“We are in a world of lower growth expectations, but that said, the long
end of the curve is actually too flat now relative to where it should be,”
said Srini Ramaswamy, a New York-based analyst on JPMorgan’s fixed-income
research team. “Given our models, which factor in our expectations for
things including economic growth, we find the recent flattening of the yield
curve as overdone,” he said in an Oct. 4 telephone interview.
Narrower Spread
The difference in yields between 10- and 30-year Treasuries, the area
Ramaswamy is referring to, was 92 basis points, down from this year’s peak
of 147 on Aug. 12. The 30- year yield plunged below 3 percent last month for
the first time since 2009, before touching 3.06 percent today.
Three-month Treasury bill rates have topped 10-year yields eight times since
1960, with recessions following in six of those cases. There hasn’t been a
contraction that wasn’t preceded by a so-called inverted curve in that
period.
The three-month bill to 10-year note spread is at 214 basis points. Federal
Reserve Bank of Cleveland researchers Joseph Haubrich and Margaret Jacobson
wrote in a report posted on the bank’s website on Sept. 30 that they
estimate the chances of the economy’s being in a recession next September
is 7 percent, up from 4.8 percent in August and 1.7 percent in July.
A “contagion” of economic indicators have come together to signal the
economy is tipping into a contraction, according to Lakshman Achuthan, co-
founder of ECRI, a research firm that predicts changes in the economic cycle.
‘Vicious Cycle’
“You have wildfire among the leading indicators across the board,”
Achuthan said in a radio interview on Sept. 30 on “Bloomberg Surveillance”
with Tom Keene and Ken Prewitt. “It’s a vicious cycle that is going to
get quite a bit worse.”
While the Labor Department said Oct. 7 that employers in the U.S. added 103,
000 workers to payrolls in September, sustained jobs growth of about 150,000
a month is needed to reduce unemployment by about half a percentage point
over a year, according to Chris Rupkey, chief financial economist at Bank of
Tokyo-Mitsubishi UFJ Ltd. in New York.
The world economy risks lapsing into a recession with the pace of growth
falling below the “new normal” level Pacific Investment Management Co. has
predicted since 2009, Gross wrote in a monthly commentary posted on the
Newport Beach, California, firm’s website Oct 3. Pimco’s “new normal”
scenario says that following the market’s collapse in 2008 the U.S. economy
would grow at a below-average pace for several years.
Gross Relents
“Markets these days give mild signs of a collapse,” Gross said in an Oct.
4 Bloomberg Television interview with Lisa Murphy. The odds of recession in
developed economies is about 50 percent, with the U.S. on the “brink,” he
said. “This is one of those times where you are worried about the return of
your money.”
After eliminating Treasuries from his $245 billion Total Return Fund in
February because they were too expensive, Gross increased holdings of U.S.
government securities to 16 percent of assets as the debt had the highest
quarterly returns in almost three years.
Treasuries returned 6.4 percent in the third quarter, the most since the
depths of the financial crisis in 2008, according to Bank of America Merrill
Lynch indexes. Stocks tumbled, with the Standard & Poor’s 500 Index
falling 14 percent, the biggest quarterly drop since the last three months
of 2008.
Increasingly Bearish
Equity traders are boosting bearish trades around the world by the most in
at least three years. Borrowed shares, an indication of short selling, have
risen to 11.3 percent of stock available for lending from 9.5 percent in
January, according to data compiled for Bloomberg by the London-based
research firm Data Explorers.
“Half the people you speak to tell you they already think we are in a
recession,” said Jeffrey Gundlach, chief executive officer of Los Angeles-
based DoubleLine Capital LP, which manages $17 billion, during a panel
discussion the firm held for clients on Sept. 29 in New York. “There
remains no real fundamental reason in the U.S. for interest rates to go
higher.”
To contact the reporter on this story: Liz Capo McCormick in New York at
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