{"id":18820,"date":"2019-09-06T05:21:08","date_gmt":"2019-09-06T05:21:08","guid":{"rendered":"https:\/\/thepatientinvestor.com\/?p=18820"},"modified":"2019-09-06T05:21:08","modified_gmt":"2019-09-06T05:21:08","slug":"interest-spreads-hold-sway-over-the-global-economy","status":"publish","type":"post","link":"https:\/\/thepatientinvestor.com\/index.php\/2019\/09\/06\/interest-spreads-hold-sway-over-the-global-economy\/","title":{"rendered":"Interest spreads hold sway over the global economy"},"content":{"rendered":"

An inverted yield curve is a reliable predictor of recessions but it also warns of falling bank profits. When the spread between long-term Treasury yields and short-term rates is\u00a0 below zero, net interest margins are squeezed.<\/p>\n

\"Yield<\/p>\n

In a normal market, with a steep yield curve, net interest margins are wide as bank’s funding maturity is a lot shorter than their loan book. In other words, they borrow short and lend long. Few bank deposits have maturities longer than 3 to 6 months, while loans and leases have much longer maturities and command higher interest rates.<\/p>\n

When the yield curve inverts, however, the spread between long and short-term rates disappears and interest margins are squeezed. Not only is that bad for banks, it’s bad for the entire economy.<\/p>\n

When their interest margins are squeezed, banks become risk averse and lending growth slows. That is understandable. When interest margins are barely covering operating expenses, banks cannot afford credit write-downs and become highly selective in their lending.<\/p>\n

Slowing credit growth has a domino-effect on business investment and consumer spending on durables (mainly housing and automobiles). If there is a sharp fall in credit growth, a recession is normally not far behind1<\/sup>.<\/p>\n

\"Bank<\/p>\n

Right now, the Fed is under pressure to cut interest rates to support the US economy. While this would lower short-term rates and and may flatten the yield curve, cutting interest rates off a low base opens a whole new world of pain.<\/p>\n

Quartz<\/a> this week published a revealing commentary on the damage that negative interest rates in developed economies are doing to bank net interest margins :<\/p>\n

The problem for commercial banks is that government bond and mortgage interest rates keep going lower, but it isn’t as easy to cut deposit rates \u2014 the rate at which banks themselves borrow from customers \u2014 at the same pace. After all, it’s tough to convince people to keep deposits in an account that returns less than they put in (even though this already happens, invisibly, through inflation).<\/p><\/blockquote>\n

\"Bank<\/p>\n

Ultra-low interest rates are likely to squeeze bank margins in a similar way to the inverted yield curve. And with a similar impact on credit growth and the economy.<\/p>\n

If I was Trump I would be pleading with the Fed not to cut interest rates<\/u>.<\/p>\n

Footnote:
\n1. The NBER declared a recession in 1966 when the S&P 500 fell 22% but later changed their mind and airbrushed it out of history.<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"

An inverted yield curve is a reliable predictor of recessions but it also warns of falling bank profits. When the spread between long-term Treasury yields and short-term rates is\u00a0 below zero, net interest margins are squeezed. In a normal market, with a steep yield curve, net interest margins are wide as bank’s funding maturity is … <\/p>\n

Continue reading “Interest spreads hold sway over the global economy”<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_mo_disable_npp":"","_jetpack_feature_clip_id":0,"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[31,17,33,34],"tags":[381,4027,2429,2439],"class_list":["post-18820","post","type-post","status-publish","format-standard","hentry","category-the-fed-banks-interest-rates","category-japan-korea","category-uk-europe-countries-regions","category-us-canada-countries-regions","tag-banks","tag-inverted-yield-curve","tag-negative-interest-rates","tag-net-interest-margins"],"yoast_head":"\nInterest spreads hold sway over the global economy - the patient investor<\/title>\n<meta name=\"robots\" content=\"noindex, follow\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Interest spreads hold sway over the global economy - the patient investor\" \/>\n<meta property=\"og:description\" content=\"An inverted yield curve is a reliable predictor of recessions but it also warns of falling bank profits. 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He founded PVT Capital (AFSL number 546090), which provides income and growth strategies to wholesale clients. Colin also co-founded Incredible Charts and writes the popular Patient Investor newsletter. Using a top-down approach, Colin identifies macro trends in the global economy and then combines fundamental and technical analysis to evaluate opportunities in sectors that stand to benefit. Focusing on interest rates and financial market liquidity as primary drivers of the economic cycle, he warned of the 2008\/2009 and 2020 bear markets well ahead of actual events.","sameAs":["https:\/\/facebook.com\/people\/The-Patient-Investor\/61572934660810\/","https:\/\/www.instagram.com\/colin_thepatientinvestor","https:\/\/au.linkedin.com\/in\/colintwiggs"],"url":"https:\/\/thepatientinvestor.com\/index.php\/author\/investor\/"}]}},"jetpack_featured_media_url":"","jetpack_sharing_enabled":true,"jetpack_shortlink":"https:\/\/wp.me\/p9tQ4n-4Ty","jetpack_likes_enabled":false,"jetpack-related-posts":[{"id":16918,"url":"https:\/\/thepatientinvestor.com\/index.php\/2018\/09\/01\/does-the-yield-curve-warn-of-a-recession\/","url_meta":{"origin":18820,"position":0},"title":"Does the yield curve warn of a recession?","author":"Colin Twiggs","date":"September 1, 2018","format":false,"excerpt":"There has been talk in recent months about the narrowing yield curve and how this warns of a coming recession, normally accompanied by a graph of the 10-year\/2-year Treasury spread which fell to 0.22% at the end of August 2018. I have always used the 10-year minus the 3-month Treasury\u2026","rel":"","context":"In "Banks & Interest Rates"","block_context":{"text":"Banks & Interest Rates","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/economy\/the-fed-banks-interest-rates\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":41768,"url":"https:\/\/thepatientinvestor.com\/index.php\/2023\/04\/28\/hard-or-soft-landing\/","url_meta":{"origin":18820,"position":1},"title":"Hard or Soft Landing?","author":"Colin Twiggs","date":"April 28, 2023","format":false,"excerpt":"Almost every recession in history has been preceded by speculation that the economy is in for a \"soft landing.\" After the early warning signs, nothing much happens. The stock market keeps climbing despite rising interest rates, raising hopes of a \"lucky escape\". The four most expensive words in the English\u2026","rel":"","context":"In "Banks & Interest Rates"","block_context":{"text":"Banks & Interest Rates","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/economy\/the-fed-banks-interest-rates\/"},"img":{"alt_text":"Unemployment","src":"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2023\/2023-04-28-u3.png?resize=350%2C200&ssl=1","width":350,"height":200,"srcset":"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2023\/2023-04-28-u3.png?resize=350%2C200&ssl=1 1x, https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2023\/2023-04-28-u3.png?resize=525%2C300&ssl=1 1.5x"},"classes":[]},{"id":14843,"url":"https:\/\/thepatientinvestor.com\/index.php\/2017\/02\/18\/bond-spreads-bullish-for-us-less-so-australia\/","url_meta":{"origin":18820,"position":2},"title":"Bond spreads bullish for US, less so Australia","author":"ColinTwiggs","date":"February 18, 2017","format":false,"excerpt":"Yield Curve The yield curve is one of the best predictors of US economic recessions. Every time the yield curve has turned negative in the last fifty years, a recession has followed. First of all, what is a yield curve? It is the plot of yields on bonds, normally Treasuries,\u2026","rel":"","context":"In "Banks & Interest Rates"","block_context":{"text":"Banks & Interest Rates","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/economy\/the-fed-banks-interest-rates\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":4526,"url":"https:\/\/thepatientinvestor.com\/index.php\/2012\/06\/03\/us-banks-face-squeeze\/","url_meta":{"origin":18820,"position":3},"title":"US banks face squeeze","author":"Colin Twiggs","date":"June 3, 2012","format":false,"excerpt":"Rising short-term interest rates (represented by 3-month Treasury yields on the chart below) caused negative yield differentials in 2006\/2007 which led me to warn of an economic down-turn. Yield differentials are calculated by subtracting short-term (3-month) yields from long-term (10-year) yields. Banks borrow mostly at short-term rates and lend at\u2026","rel":"","context":"In "Banks & Interest Rates"","block_context":{"text":"Banks & Interest Rates","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/economy\/the-fed-banks-interest-rates\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":18049,"url":"https:\/\/thepatientinvestor.com\/index.php\/2019\/03\/30\/inverted-yield-curve-is-no-cause-for-panic-yet\/","url_meta":{"origin":18820,"position":4},"title":"Inverted yield curve is no cause for panic….yet","author":"Colin Twiggs","date":"March 30, 2019","format":false,"excerpt":"10-Year Treasury yields continue to fall. A Trend Index peak below zero signals strong selling pressure (purchases of bonds).\u00a0 Target for the decline is primary support at 2.0%. The spread between 10-Year and 3-Month Treasury yields is at zero, warning that the yield curve is about to invert. While there\u2026","rel":"","context":"In "Banks & Interest Rates"","block_context":{"text":"Banks & Interest Rates","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/economy\/the-fed-banks-interest-rates\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":14233,"url":"https:\/\/thepatientinvestor.com\/index.php\/2016\/09\/24\/flattening-yield-curve-low-bank-interest-margins\/","url_meta":{"origin":18820,"position":5},"title":"Flattening yield curve & low bank interest margins","author":"ColinTwiggs","date":"September 24, 2016","format":false,"excerpt":"The Yield Differential, calculated by subtracting 3-month from 10-year Treasury Yields, is trending lower. This warns that the yield curve is flattening but we are still above the danger area below 1.0 percent. A flat yield curve squeezes bank interest margins and often precedes a credit contraction. But there is\u2026","rel":"","context":"In "Banks & Interest Rates"","block_context":{"text":"Banks & Interest Rates","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/economy\/the-fed-banks-interest-rates\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]}],"_links":{"self":[{"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/posts\/18820","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/comments?post=18820"}],"version-history":[{"count":2,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/posts\/18820\/revisions"}],"predecessor-version":[{"id":18829,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/posts\/18820\/revisions\/18829"}],"wp:attachment":[{"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/media?parent=18820"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/categories?post=18820"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/tags?post=18820"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}