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Is Yield Curve Analysis Even Useful Anymore?


A trader looks back at past yield curve signals and the popular delusion of the US long bond.


Adjusted for Inflation
Around this time, most of the street, and all the Perma Bears & Academic authorities who were late to the game, were calling for new lows. But the new ZIRP world order was pumping cash into the system and those dollars needed allocation somewhere. This type of environment is in my view classically described as an invisible crash, similar to what James Dines predicted in the 70's where nominally we see a rising stock market but in real terms (priced in gold) the Dow Jones Industrial Average continues its journey south (as in the picture above).

May 2011 High-Liquidity Pump Still Primed? -- Still no inversion, still very steep, and no spike in volatility anywhere on the curve. At this point, momentum technicals were suggesting the S&P 500 (INDEXSP:.INX) was getting a little frothy, but there weren't any bond market signals of another major top or bear market. At that time, I remember wondering, "If the short end is anchored, how could it signal anything? Maybe the Fed's manipulation has taken away the short end of the curve's ability to announce fears of inflation."

August Low 2011 – Race to the Bottom
After the 2011 retracement you can see there was another slight flight to quality in the long end of the curve as the market clearly had nowhere to go in the front end.

April 2012 – A little less steep
Now it is clear that Operation QE Infinity is cemented into global monetary policy. Again, there weren't any signs of inversion. Be mindful, since the FED is manipulating the interest rate curve it could be possible that we won't be able to see a signal from the short end going forward until it cracks open and the invisible hand takes away control of this manipulation by very rapid inflation and a crisis of confidence in the dollar.
Long RRPIX and short TLT Call Spreads (related securities).
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