JACKSON HOLE, Wyo. -- Just a couple of quick notes today.
(a) Again. Forget the coupon curve.
It is unwise to conclude that inversion here points to a sharp slowdown in economic activity immediately ahead. The spread between the bond and the two is not the thing you want to be looking at when you're trying to figure out what Treasuries are saying about Economy Future.
Look instead at the gap between the 10-year note and the three-month bill, which we
mentioned yesterday (and do read that
paper if you haven't), or the gap between the 10 and the fed funds rate, which is one of the components of the
index of leading economic indicators. These are the spreads that incorporate expectations as to whether monetary policy is restrictive enough to slow the economy meaningfully.
At the moment they say that it is not. Ten-three averaged 116 basis points (1.16%) for the month of January (which went down as the second biggest such spread since June 1997) and stands at about 93 basis points now (compare to an average 86 bp for all of 1999). Ten-funds averaged 121 bp last month (which went down as the biggest such spread in 33 months) and stands at about 84 bp now (compare to an average 67 bp for all of last year).
Neither of these spreads comes even close to suggesting that a sharp slowdown in economic activity lies immediately ahead. The folks who are predicting one on the basis of what the coupon curve's doing are to be ignored.
(b) Jack was nimble.
Do the right thing even when the right thing doesn't quite seem right.
Keep in mind things like last year. Lots and lots of people refused to get short bonds because the core (excluding food and energy) price measures kept turning in lower lows; it just didn't make a whole lot of sense to get short.
And yet getting short was the right thing to do.
Now, against a backdrop of an economy that shows no signs at all of slowing and a central bank that will be in their faces at least through summer, lots and lots of people are hesitant to buy the bond.
And yet that is the right thing to do.
Keep in mind things like last week. Jack was bold enough to be
buying on Wednesday. He respected the fundamentals enough to be short into Friday. He did the right thing in buying the dip that followed.
Keep asking yourself this.
What would Jack do?
Even if it doesn't seem quite right.