Yield Curves, Inversion, The Eurodollar And Bitcoin

What is the yield curve?What does it suggest when its inverted?What is yield curve control (YCC)? And how does the eurodollar fit into all this?Inspirational Tweet: Link to tweet thread.As Lyn Alden explains in this thread: “… the 10-2 curve is stating, were probably getting close to a possible economic crisis, however not validated, and probably many months away …”Lets break that down a bit, shall we?What Is The Yield Curve?First of all, exactly what is the yield curve that everybody seems to be talking about lately, and how is it tied to inflation, the Federal Reserve Board and possible recession?The yield curve is basically a chart plotting all the present nominal (not including inflation) rates of each government-issued bond. Maturity is the term for a bond, and yield is the yearly rates of interest that a bond will pay the buyer.A typical yield curve (this one from 2018) chart will normally look like this: SOURCE: FRED ®, Federal Reserve Bank of St. LouisThe Fed sets what is called the federal funds rate, and this is the shortest interest rate you can get a quote on, as it is the rate (annualized) that the Fed recommends commercial banks borrow and provide their excess reserves to each other overnight. This rate is the benchmark that all other rates are priced from (or so, in theory). As you can see, in a regular financial environment, the much shorter the maturity of the bond, the lower the yield. This makes perfect sense in that, the shorter the time dedicated to lending money to somebody, the less interest you would charge them for that concurred lockup duration (term). So, how does this inform us anything about future economic downturns or possible recessions?Thats where yield curve inversion enters play and what we will take on next.What Does It Mean When Its Inverted?When shorter-term bonds, like the 3-month or the 2-year, start to reflect a greater yield than longer-term bonds, 10-year or even 30-year, then we understand there is anticipated difficulty on the horizon. Essentially, the market is informing you that financiers are expecting rates to be lower in the future since of an economic slowdown or recession.So, when we see something like this (e.g., August 2019): SOURCE: FRED ®, Federal Reserve Bank of St. Louis … where the 2-year and 3-month bonds are yielding more than the 10-year bonds are, investors start to get nervous.You will also often see it expressed like below, revealing the real spread in between the 2-year and the 10-year rates of interest. Notification the temporary inversion back in August 2019 here: SOURCE: FRED ®, Federal Reserve Bank of St. LouisWhy does it matter a lot, if it is just an indicator and not a reality yet?Because inversion not just shows an expected slump, but can really create chaos in the loaning markets themselves and trigger issues for companies in addition to consumers.When short-term rates are greater than long-lasting, customers who have variable-rate mortgages, house equity lines of credit, individual loans and credit card financial obligation will see payments increase due to the fact that of the increase in short-term rates.Also, revenue margins fall for business that borrow at short-term rates and provide at long-lasting rates, like many banks. This spread collapsing causes a sharp slump in earnings for them. So they are less going to lend at a reduced spread, and this only perpetuates borrowing problems for lots of consumers.Its an agonizing feedback loop for all.What Is Yield Curve Control?No surprise, the Fed has a response to all this– do not they always? In the type of what we call yield curve control (YCC). This is essentially the Fed setting a target level for rates, then entering the free market and purchasing short-term paper (1-month to 2-year bonds, usually) and/or offering long-lasting paper (10-year to 30-year bonds). The purchasing drives the short-term bond rate of interest lower and the selling drives the long-term bond rate of interest higher, thus normalizing the curve to a “healthier” state.Of course, theres an expense to all this with the most likely expansion of the Feds balance sheet and additional expansion of the cash supply, particularly when the open market does not get involved at the level required for the Fed to achieve its targeted rates.Result? Possible exacerbated inflation, even in the face of a contracting economy. Which is what we call stagflation. Unless the control of the curve assists head off a pending economic downturn and financial expansion resumes: a big “if.”What Is The Eurodollar And How Does It Fit Into All This?A eurodollar bond is a U.S. dollar-denominated bond issued by a foreign company and kept in a foreign bank outside both the U.S. and the companys house country. A bit confusing, as the prefix “euro” is a blanket reference to all foreign, not just European business and banks.More significantly, and in our context here, eurodollar futures are interest-rate-based futures contracts on the eurodollar, with a three-month maturity.To put it just, these futures will trade at what the marketplace anticipates U.S. 3-month rate of interest levels will be in the future. When the market anticipates interest rates to peak, they are an additional data point and indication of. (This is also called the terminal rate of the Fed cycle.)If the December 2023 eurodollar contract shows an implied rate of 2.3% and the rates decreasing to 2.1% in the March 2024 agreement, then the expected peak for the fed funds rate would be at the end of 2023 or early 2024. Easy as that, and simply another place to look for hints of what investors are believing and expecting.What You Can Do About It … (Yep– Bitcoin)Lets say youre seeing rates closely and hearing that the Fed is going to start utilizing YCC to handle the rate curve, consequently printing more cash and, in turn, most likely triggering more long-lasting inflation. And what if inflation in some way gets out of control? How can you protect yourself?It does not matter when you read this, as long as the world is still running mostly with fiat (government-issued and “backed”) money, bitcoin stays a hedge versus inflation and insurance coverage against devaluation. I wrote a basic but thorough thread about that here: Link to tweet thread.To determine the inflation hedge attributes of Bitcoin, its simple really. Because Bitcoin is governed by a mathematical formula (not a board of directors, CEO, or founder), the supply of bitcoin is definitely limited to 21 million total.Furthermore, with a truly decentralized network (the computers that collectively govern the Bitcoin algorithm, deal, and mining settlements), settled transactions and total variety of bitcoin to be minted will never change. Bitcoin is for that reason immutable.In other words, Bitcoin is safe.Whether or not the cost of bitcoin (BTC) is unpredictable in the brief term does not matter as much as the reality that we understand the value of the U.S. dollar continues to decrease. And in the long term and in overall, as the dollar declines, BTC values. It is therefore a hedge against long-term inflation of not simply the U.S. dollar, however any government-issued fiat currency.The highlight? Each single bitcoin is made up of 100 million “pennies” (really the smallest unit of bitcoin – 0.00000001 btc – is called satoshis, or sats), and one can therefore buy as little or as much they can or wish to in a single deal.$5 or $500 million: You name it, Bitcoin can manage it.This is a visitor post by James Lavish. Opinions expressed are totally their own and do not always reflect those of BTC Inc or Bitcoin Magazine.

Maturity is the term for a bond, and yield is the yearly interest rate that a bond will pay the buyer.A typical yield curve (this one from 2018) chart will usually look like this: SOURCE: FRED ®, Federal Reserve Bank of St. LouisThe Fed sets what is called the federal funds rate, and this is the fastest interest rate you can get a quote on, as it is the rate (annualized) that the Fed suggests industrial banks borrow and lend their excess reserves to each other over night. Notice the momentary inversion back in August 2019 here: SOURCE: FRED ®, Federal Reserve Bank of St. LouisWhy does it matter so much, if it is just an indicator and not a reality yet?Because inversion not only shows an expected recession, however can in fact wreak havoc in the financing markets themselves and cause issues for business as well as consumers.When short-term rates are higher than long-lasting, consumers who have adjustable-rate home loans, home equity lines of credit, personal loans and credit card financial obligation will see payments go up since of the rise in short-term rates.Also, revenue margins fall for business that obtain at short-term rates and provide at long-lasting rates, like numerous banks. The purchasing drives the short-term bond interest rates lower and the selling drives the long-term bond interest rates higher, thus stabilizing the curve to a “much healthier” state.Of course, theres an expense to all this with the likely expansion of the Feds balance sheet and additional expansion of the cash supply, particularly when the open market does not get involved at the level necessary for the Fed to achieve its targeted rates.Result? If the December 2023 eurodollar agreement reveals an implied rate of 2.3% and the rates decreasing to 2.1% in the March 2024 contract, then the anticipated peak for the fed funds rate would be at the end of 2023 or early 2024. Easy as that, and just another location to look for clues of what investors are thinking and expecting.What You Can Do About It … (Yep– Bitcoin)Lets state youre viewing rates carefully and hearing that the Fed is going to start using YCC to handle the rate curve, consequently printing more money and, in turn, most likely triggering more long-term inflation.