Flat Curves And Low Rates

I usually address one topic per column in this publication, but I have two quick takes for this issue. The first is on the flattening yield curve.

The talk of the flattening yield curve has been a hot topic this year, especially by Wall Street types who have never studied the history of the yield curve. To hear some of them tell it, the current relatively flat yield curve will lead to an inverted curve and cause a recession. The only part of that sentence that is true is that the curve is relatively flat.

First, an inverted curve is a symptom of a possible recession, not a cause. The curve inverts because bond traders sense the Fed has pushed too far and is staying tight too long. Second, a flat curve and even occasional short-term inversions mean nothing alone and can last a very long time. ContentMiddleAd

Starting in late 1994 through 1996, the yield spread between the 2-year and 10-year note was roughly 40-50 basis points, approximately the spread this year. In 1997, that spread was down to 20 basis points and even flat from time to time. From 1998 through 1999, the spread was roughly 10 basis points with several short periods of inversion. In February 2000, the curve finally inverted and stayed inverted. The bond market was correct in that the economy did weaken later that year, but a recession didn’t kick in until 2001.

When you hear the hoopla on the yield curve, please remember that a true inverted curve from beginning to end must be in place and must last at least six months to be an accurate forecast of recession. The yield curve can stay flat and go through brief inversions for a very long time. If you want to be prepared for a recession, watch for a flat curve; however, look at it within the context of other factors in the economy and not as a stand-alone predictor. This second topic I’ll address from the viewpoint of a consumer and credit union member: Hey credit union, what’s up with the low rates?

My warning to the movement’s leaders is to make sure members aren’t jumping ship.

With some exceptions, deposit rates at most credit unions remain stubbornly low after 150 basis points of Fed tightening. It’s not a surprise. It’s hard to pull that trigger that will squeeze interest rate margins until the credit union must, and most industry leaders probably don’t think they have to yet. Other credit unions and banks are playing the same game and a canvas of nearby competition might suggest the credit union is in line with its competition. But are you sure you are not springing a leak in your deposit boat?

The top money market account rate at my credit union is 0.40%. That seems to be in line with other credit unions and might be competitive in your market, but let me give you my personal experience. For the past year or so I have put my cash in a staggered maturity of T-bills. My last buy was a six-month T-bill at 2.00%. I had not bothered to check the money market rate at my brokerage until just recently, as the various money market rates there were stubbornly low for a while. When I looked at the rate for checking, it was 1.74%.

Some banks are waking up, too. I have had multiple solicitations, mostly from online banks, for money market accounts at rates well above 1%. Just a couple of days ago I got an old-fashioned snail mail glossy card from a large California bank not Bank of America or Wells Fargo with local branches offering me 1.50% for a $10,000 minimum. The rate is guaranteed not to drop before June 2019, but it can go higher. It also offered a one-year CD for 2.25%.

So, I can put money at my credit union for 0.40% or go to multiple other platforms for four to five times that rate. What would you do?

Perhaps most consumers simply haven’t woken up to what is out there, or maybe the higher rates are not widespread. My warning as a member to the movement’s leaders is to make sure members aren’t jumping ship. You might not need them now, but you might when the waters get choppy.

Dwight Johnston is the chief economist of the California and Nevada Credit Union Leagues and president of Dwight Johnston Economics. He is the author of a popular commentary site and is a frequent speaker at credit union board planning sessions and industry conferences.

This article appeared originally in Credit Union Strategy & Performance. Read More Today.