So, is the bond market anticipating a slowdown or a recession?

[swag]

The yield curve is flattening out, and the yield on the 10-year note is itching to crash down through 4%.

Who's buying all these bonds and why?

Is the bank of Japan at it again? Clearly the treasuries aren't prized any more as a hedge against deflation.

The Bushco. and tax-cut apologists who pretend to be financial pundits are opining that the bond market is anticipating a "slowdown" but not a "recession."

Scusa me, but we're in a slowdown. I think the bond market is fearing a recession, brought about by jacked oil prices and, yes, aided by Fed tightening.

What do the econo-minds here think?

[PROGRESSIVE1]

1. The yield curve in just about flat.

I'm not sure if another recession is on it's way, but the economy is slowing down. Shrubie hasn't made one new job in his failed tenure and racked up a massive debt too. If * gets another term, I see another recession coming in. JK can make things better.

[stevebreeze]

2. I don't know beans about yields but...

I do know that while housing spending is up, permits are down 7%. Permits show future direction, spending is mostly continuing with what is under way.

I know the housing bubble looks frightening.

I do know that personal lending is way up there, not where you want it for a recovery.
I suspect we are in for tough times no matter who gets elected Nov 2nd, but LONG TERM, we will be fa better off with Kerry.

3. Maybe a Fannie Mae collapse?

This would trash the mortgage markets. As another sign, the house builder companies and analysts have been plugging their stocks, as if they are scared silly.

WSJ says this 09/23:

--In a 200-page report released late yesterday afternoon, the regulator, the Office of Federal Housing Enterprise Oversight, or Ofheo, said its findings "raise concerns regarding the validity of previously reported financial results, the adequacy of regulatory capital, the quality of management supervision and the overall safety and soundness" of the company.--

4. One thing Bush can't say

"Economy is strong and getting stronger" Unless I am wrong, the bond market is disagreeing!

An alternate possibility is that the so-called "carry trade" is getting out of control again; I am planning on doing a piece on this.

But the drop does seem most synchronized with the growing Fannie Mae mess.

I would disagree that it is due to oil; I calculated the rise in gas payments compared to the rise in house payments (not due to interest rates, but only mortgage size)...and the house payments thing weighs more than oil.

Interest rates being too low is causing some problems; the small rise so far probably hasn't done much negative.

[mastein]

5. Fannie's effect, the bond market and some stocks also

Thanks for picking up on my thread about the fed the other day. Correct me if I am wrong, but I thought Fannie Mae's job is essentially just to package up the mortgages for sale on the market. I know they have had some accounting issues. (A friend of mine is an accountant for them.) But how much affect can that have on the economy? Not a lot I am afraid.

The yield curve flattening and possibly inverting is not a good sign. And with the Fed raising rates without the market either leading or following suit in any of the major categories seems at the least politically dubious to me. Add that too that the economic news for all sectors but defense spending, which is tepid at best I don't see how the rate increases were anything approaching rational. (I find it the equivalent of whistling through a dark graveyard at this point in time.) I think Shrub and Greenspan have cut a deal.

There is still a heck of a lot of money on the sidelines that I think is going to be used for commodity plays and other short term "investing" (read speculation). The fact that there is so much money on the sides and or in foreign markets says volumes about Wall St.'s opinion of the current government's ability to manage the economy.

6. The Fannie notes really aren't backed by anyone;

And no one could afford it, if they were. The notes exceed US Treasury debt. The FDIC banks are holding a lot of the notes. Read the report.

Whoops.

re:
But how much affect can that have on the economy? Not a lot I am afraid.

[bonddad]

8. Fannie's job

Fannie, Freddie and Ginnie all purchase pools of mortgages, structure them is various ways (either as strait pass-through pools or as carved cash flows - CMOS). Their primary job is to provide liquidity to the market. The smaller banks pool their mortgages and sell them either to larger banks or directly to the three agencies. Sometimes the small banks keep the maintenance on the mortgages to maintain a small amount of non-mortgage income.

Here is where the problem may occur. All three agencies have an incredibly high credit rating. If there is an accounting issue, this credit rating could drop, or investors could simply loose confidence in the agencies. This could lead to an increase in interest rates throughout the economy.

[Rapier2]

10. notes

I have 3 posts about Fannie here.
http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=114x11317

As to just securitizing mortgages they also hold over a trillion dollars of them. They are the buyer of first and last resort. Their role as the main spigot of credit and money growth espcially over the last 4 years cannot be overstated. Without the mortgage mania we would have had a real recession in 2001, and beyond. Instead we borrowed our way out of one. I'm speaking here not just about real estate purchases but also the refi home equity loan mania.

Mortgage borrowing is this year going to be 300% of bussiness and commercial loans and leases. This is non productive borrowing folks. It will generate 'wealth' only if home asset values continue to rise. It generates no income. This is a profound distortion of the very tenents of Adam Smiths capitalism.

The Tower of Babble that is our derivatives (paper) flooded financial world is teetering as it's very foundation, Frannie Mae, must now reign in its profligate ways. It is my and others contention that the only thing keeping the credit bubble afloat is an endless expansion of borrowing. With the GSE's now failing to grow their holdings of mortgages a new source of liquitiy must be found. Good luck.

[Rapier2]

7. notes

In all probability the sharp drop in long term rates this week was caused by the derivatives market where the players, Fannie Mae and the GSE's in particular, bought bond futures to hedge their positions thereby dropping rates lower necessitating more buying, in a circle.

These market melt ups have become quite common over the last several years. The last was coincident with the historic low in rates this spring. In other words it is a fools errand trying to use fundamental analysis to interpret why the markets are moving. The bond move this week might be said to have started on 'news' that the economy was weaking but once the ball was rolling it was the internal structure of the market itself which drove it. This is really always the case. The thing now is that with the explosion derivatives in the interst rate/credit universe the divorce of this market from the 'fundamentals' is argueably the more severe than with any market in history, perhaps save the tulip bubble.

It should be noted that short term interest rates actually rose this week. The flattening of the yield curve is in all likelihood causing major problems with hedge funds and The Streets massive "carry trade" business. In any case the carry trade, Greenspans real gift to the financial industry, is being squeezed by these trends into oblivion.

Various other spreads are gyrating wildly as well with high risk debt of many flavors being scorned, again another source of trouble for speculators.

The sharp drop in long rates does offer the promise of reigniting the mortgage and refi bubble but until rates equal the spring lows in all likelihood a repeat of that blow off isn't too likely.

Greenspan et. al. probably hope more than anything to reign ignite the mortgage bubble as that was and is the primary mechanism in generating liquidity, ie. money growth. The money supply has been stagnating of late despite the Feds aggressive open market operations.

[Randall_Burns]

9. Vendor Financing

From what I can see: the major source of loans to the US right now are countries like Japan for whom the US represents a major market.