bd7 wrote: Fri Aug 29, 2025 10:57 am
NiceUnparticularMan wrote: Fri Aug 29, 2025 10:28 am
OK, so for present purposes, the important point is an inverted yield curve represents a market expectation that yields on the longer term bonds will be trending lower in the future. Which is the same thing as saying prices for those bonds will be trending higher in the future.
But to a large degree, “market expectation” is largely various thoughts on what the Fed will do.
That is certainly one factor, and that is part of the reason expected recessions can lead to inverted yield curves, on the further expectation a recession will lead to Fed rate cuts.
It is not ONLY that however. Ultimately, it is all some form of prediction of future demand, with Fed policy often playing an important role in demand.
An inverted yield curve can be just a result of the Fed single-handedly holding up short term rates since they have a pretty good grip on that.
So often one of the reasons why the bond markets might expect medium to longer rates to come down when the yield curve normalizes is that they expect that will all be happening in a context of the Fed Funds rate coming down. If they didn’t expect that, though, the yield curve could be flatter than normal, but should not typically be inverted.
My prediction is (and has been) that we’re either going to have high inflation, high interest rates or both unless there is a significant economic collapse.
So obviously the bond markets are not expecting a dramatic increase in interest rates, because if so the yield curve would be sloping upward steeply.
Of course the bond markets are often wrong–really always wrong to some extent. So you may feel confident you know better. Personally, I never do.
But I still have a significant amount of money in short-term investments and I don’t think that is MLA, it is opportunistic.
Sure, if you are speculating longer bond rates will go up, this is the same as speculating those bond prices will go down. If you are right, you will make some money parking in cash or short-term while waiting for this to happen.
Which is conceptually no different from, say, speculating stock prices will go down, and parking in cash or short-term while waiting for that to happen.
Plenty of people do both of those things, and I agree that is not so much MLA as just having a strong confidence in your own ability to profitability beat the market with such timing schemes.
IOW, you could have the yield curve uninvert and not see any real appreciation in long term bonds.
Anything is possible, but again an inverted yield curve is a market prediction that the longer rates are going to come down, even as shorter rates come down faster, when the yield curve normalizes. And more often than not, that is right.
You can see that here, for example:
Inversions are uncommon, of course, but when they happen, and then the yield curve normalizes, often long-term rates have fallen as well.
The timing can be imperfect, though, so sometimes with good timing you might make a bit of a profit. As is generally true with market timing schemes–they don’t always fail, just more often than not, and success depends on very good timing.
