The disconnect between long-term and short-term rates

Bob Doll highlighted the disconnect between long-term and short-term rates in his latest review. The chart below plots the 3-month T-bill rate against 10-year Treasury yields.

Spot Gold/Light Crude

At this stage, the disconnect is not significant. But a disconnect as in 2004 – 2005 is far more serious. Large Chinese purchases of Treasuries prevented long-term rates from rising in response to Fed tightening, limiting the Fed’s ability to contain the housing bubble.

8 thoughts on “The disconnect between long-term and short-term rates

  1. john says:

    There has been an indisputable flattening in the yield curve as evidenced even between the 10 and 30 yr rates. Not there at this point but negative spread = recession.

    • ColinTwiggs says:

      I agree. But we are still a long way from negative. Even when the yield curve does go negative, there tends to be a 6 to 12 month lag before the contraction starts to bite.

  2. Martha says:

    Yes … no disconnect, at all. Disconnect does not mean that they both move up together. Short-rates [ demand for short term cash demand, economic management ] not the the major influence on long rates [ long rates = predominantly inflation]

    Both up relative to 9/12 months ago … that’s the connection. So, because there’s this connection, there – by definition – cannot be said there’s a ‘disconnect’.

    All the best.

    • ColinTwiggs says:

      “Disconnect does not mean that they both move up together.”

      I disagree. Disconnect is when LT and ST rates move in opposite directions. I do agree that the LT market sometimes anticipates ST movements, so you get an early spike in LT rates, but one would still expect rates to continue traveling in the same direction if not the same magnitude.

      “Short-rates [ demand for short term cash demand, economic management ] not the the major influence on long rates [ long rates = predominantly inflation]”

      Again I disagree. ST rates are a major influence, but not the only influence, on LT rates. If the major influence on LT rates was inflation expectations, then we should expect LT rates to fall when ST rates rise. This paper from the Kansas Fed discusses the correlation between LT and ST rates: https://www.kansascityfed.org/publicat/econrev/pdf/4q95role.pdf

      • Martha says:

        Colin,
        There’s been a “diverse” movement in LT and ST rates between the years 2008 to 2015 = a seven year “diverse” movement, but not a ‘dis-connect’ – same now; experience of 2008-2015 also supports my view [ that you disagreed with] = I printed *Short-rates [ demand for short term cash demand, economic management not the the major influence on long rates [ long rates = predominantly inflation*

        That is, diverse movement – for specific,understandable, reasonable and appropriate reasons = they moved in the opposite directions, because of different causation factors … it happens = no cause for concern now, or to call it a ‘dis-connect’.

        Cheers, and thanks for your efforts.

      • ColinTwiggs says:

        Martha,
        The Kansas Fed paper is worth reading. It examines how ST rates affect LT rates in great detail. Interesting that LT rates often anticipate movements in ST rates.

        Thanks for your views.

  3. Martha says:

    Colin,
    At the moment there is really no disconnect. at all, to speak about. Furthermore, there appears an absence of evidence to suggest any future disconnect will materialise.

    Thus, all’s well …. the Bull Market in American equities, and bonds ( inflation subdued ) is expected to continue [ and, as relative value there erodes, attention will turn to Aussie shares – foreign ownership currently ~50% = buy XJO 200 ] as I presented in previous post – https://goldstocksforex.com/2017/06/23/bearish-outlook-for-the-asx/

    🙂

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