Yield Curve Inversion Part One
Here is something you have to see. And it graphically shows why you really dont want to see an inversion of the yield curve. Go to this web site and scroll the yield curve to the dates below.
http://stockcharts.com/charts/YieldCurve.html
The chart dynamically compares on a given date: the value of the SP500 to the yield curve that existed on that day. The yield curve components: short, 5, 10, 30 year rate
July 20, 1998 - 5 and 10 year rate EQUAL
5 year rate = 10 year rate, technically not inverted
SP500 is at a peak 1190, the 5 year rate pulls equal to the 10 year rate on that day. SP500 bottoms at 923 on 10/8/98. A drop of 23%.
August 31, 1998 - NORMAL
The 5 year rate gets below the 10 year, where it should always be. Note the SP starts going up again from that date.
Fed Activity:
After the almost inversion in July 1998 and the subsequent market blow off until August, The fed lowers rates in Sept , Oct and Nov 1998 by 75 basis points from 5.50 to 4.75. From Nov 1998 until May 2000 the Fed raises the rate 175 basis points from 4.75 to 6.5
February 3, 2000 - INVERSION
The 5 year rate exceeds the 10 and 30 year rate. Note where the SP is at this point. This is the beginning of the end. The inversion stays in place until 10/27/2000.
Less than 5 weeks after the inversion, on 3/10/00 the NASDAQ peaks at 5132, by 04/05/00 it has blown its top and gone down to 4009. A 22% loss at this point. The exodus of cash heads into the safety of the SP500 keeping it afloat, and the bond market, driving down long term rates.
On 3/24/00 the SP500 peaks at 1553, but its days are numbered. Its fall is delayed 5 months by the defensive money coming from the NASDAQ.
August 14, 2000 - SEVERE INVERSION
A severe inversion, the short term rate is now equal to the 5, and above the 10 and 30 year. The bond market party has now dragged the 5 year down as well.
August 24, 2000 - TOTAL INVERSION
Total inversion, the short term rate is now above the 5, 10 and 30 year rate. The last straw, like a overdosing junkie, the bond market has its final convulsion.
Three days later, on 08/27/00 the SP500 sees it last high at 1530. The SP500 can no longer withstand the force of the prolonged inversion of the yield curve. Even the flight of funds from the NASDAQ implosion cannot save it, it finally caves in.
The index plunges until 10/06/02 when it bottoms at 768. A loss of 50%. On that same day, the NASDAQ finally bottoms at 1108. A loss of 79%.
http://stockcharts.com/charts/YieldCurve.html
The chart dynamically compares on a given date: the value of the SP500 to the yield curve that existed on that day. The yield curve components: short, 5, 10, 30 year rate
July 20, 1998 - 5 and 10 year rate EQUAL
5 year rate = 10 year rate, technically not inverted
SP500 is at a peak 1190, the 5 year rate pulls equal to the 10 year rate on that day. SP500 bottoms at 923 on 10/8/98. A drop of 23%.
August 31, 1998 - NORMAL
The 5 year rate gets below the 10 year, where it should always be. Note the SP starts going up again from that date.
Fed Activity:
After the almost inversion in July 1998 and the subsequent market blow off until August, The fed lowers rates in Sept , Oct and Nov 1998 by 75 basis points from 5.50 to 4.75. From Nov 1998 until May 2000 the Fed raises the rate 175 basis points from 4.75 to 6.5
February 3, 2000 - INVERSION
The 5 year rate exceeds the 10 and 30 year rate. Note where the SP is at this point. This is the beginning of the end. The inversion stays in place until 10/27/2000.
Less than 5 weeks after the inversion, on 3/10/00 the NASDAQ peaks at 5132, by 04/05/00 it has blown its top and gone down to 4009. A 22% loss at this point. The exodus of cash heads into the safety of the SP500 keeping it afloat, and the bond market, driving down long term rates.
On 3/24/00 the SP500 peaks at 1553, but its days are numbered. Its fall is delayed 5 months by the defensive money coming from the NASDAQ.
August 14, 2000 - SEVERE INVERSION
A severe inversion, the short term rate is now equal to the 5, and above the 10 and 30 year. The bond market party has now dragged the 5 year down as well.
August 24, 2000 - TOTAL INVERSION
Total inversion, the short term rate is now above the 5, 10 and 30 year rate. The last straw, like a overdosing junkie, the bond market has its final convulsion.
Three days later, on 08/27/00 the SP500 sees it last high at 1530. The SP500 can no longer withstand the force of the prolonged inversion of the yield curve. Even the flight of funds from the NASDAQ implosion cannot save it, it finally caves in.
The index plunges until 10/06/02 when it bottoms at 768. A loss of 50%. On that same day, the NASDAQ finally bottoms at 1108. A loss of 79%.
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