Investment & Economics Wiki

Bond Yields

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Summary

In PSE’s framework, bond yields and the yield curve are among the most important cycle indicators — but they must be interpreted within the 18.6-year real estate cycle, not in isolation. A yield curve inversion does NOT signal an immediate crash; what signals the top is the re-inversion back to positive (the “un-inversion”). Rising long-bond yields at end-of-cycle confirm the credit tightening that terminates the cycle. The yield gap (government bond yield vs. industrial earnings yield) is PSE’s gauge of relative market valuation.

Core Claims

Mechanism / How It Works

The Yield Curve (Short vs. Long Rates)

  • Normal/Widening (positive): Long rates > short rates → banks profitable (borrow short, lend long) → credit expansion → cycle continues
  • Inverted (negative): Short rates > long rates → banks squeezed → credit contraction signal → recession follows (but NOT immediately in 18.6-year framework; can persist 1–3 years before collapse)
  • Re-inversion to positive (PSE’s key signal): Curve reverting to normal AFTER inversion = recession imminent; markets typically rally while this happens (fooling most analysts)

The Yield Gap (PSE’s “Economic Barometer”)

  • Formula: Government 10-year bond yield ÷ Industrials earnings yield
  • High yield gap: Shares expensive relative to bonds; speculative conditions
  • Low yield gap: Shares cheap relative to bonds; buying opportunity
  • PSE has tracked the yield gap for Australia, US, UK, and NZ since 1999
  • As of April 2020: share yields remained higher than bond yields → complete selloff considered unlikely

Bond Yields at Cycle End

  1. Short-term rates cut by central bank (QE) → fuels credit expansion
  2. Long-term rates start rising as inflation returns and government debt grows
  3. “Inversion resolves” → market interprets as all-clear; actually signals late-cycle
  4. Rising long bond yields make land debt unsustainable → cycle tips
  5. Key levels for 2026: US 30-year Treasury > 5% flagged as dangerous threshold

Key Data Points

  • 2019 yield curve inversion: Correctly predicted 2020 recession (COVID)
  • 2022 inversion: Phil Anderson argued this would NOT bring immediate crash due to cycle position (confirmed: no crash 2022–2025)
  • 2025 un-inversion: Yield curve moving back to positive as of mid-2025 = genuine late-cycle warning
  • March 2025 Gann email: US 30-year bond yield approaching 5%; viewed as breakout level
  • 2026: Tariffs risk higher inflation → higher bond yields → potential cycle trigger
  • March 2026 “Trump blink”: Bond market forced Trump to reverse tariff policy; speed of yield rise (not level) was the trigger

Yield Curve as Sector Signal

  • Widening yield curve (positive): Banks profitable → buy banks early in second half
  • Inverting/flat curve: Rotate away from banks; watch for credit stress
  • Insurance stocks breaking out: Leading signal for higher long rates (insurance stocks = bond proxies)
  • REITs: Sensitive to interest rate rises; underperformed 2022–2024 due to this sensitivity

PSE Indicators Chartbook (Yield)

PSE has tracked yield curves monthly since 1999 for:

  • US (2yr/10yr spread; 30-year Treasury)
  • Australia (bank bill rate vs. 10-year government bond)
  • UK Key indicator files: yield-curves-the-economic-barometer.md, us-yield-curve-explanation.md, the-importance-of-a-yield-curve-inversion-and-when.md

Applications

  • At cycle start: Rising long rates with widening curve = buy banks; cycle accelerating
  • Mid-cycle: Monitor inversion; if yield curve inverts, don’t panic — check cycle position
  • Late cycle: Watch for un-inversion (return to positive) — real recession warning
  • End-of-cycle signal: 30-year Treasury breaking above 5% = credit cost unsustainable
  • Yield gap: Use as valuation tool alongside Bubble Index and Rule of 20

The Great Maturity Wall (2026)

A specific bond yield risk flagged by Akhil Patel:

  • $9 trillion in US Treasuries maturing in 2026 (~1/3 of all outstanding)
  • ~$350 trillion in global corporate debt requiring refinancing (“Great Maturity Wall”)
  • If yields stay elevated as this debt rolls over, credit contraction becomes automatic
  • This is a structural amplifier of the cycle-end credit crunch

Contradictions & Open Questions

  • PSE’s “un-inversion” signal is not universally recognized — mainstream economics treats the inversion itself as the recession signal
  • The 2022 inversion lasted longer than most prior inversions without recession — Phil’s explanation (cycle position) held, but is hard to disprove
  • Japanese government bond yield surge (2025) cited as potential global contagion risk
  • Phil Anderson suggested (2021) currency crisis may be the cycle-end mechanism rather than bonds — these overlap but are distinct scenarios

Visual Evidence

Slides showing bond yields, treasury charts, and money flow analysis.

10-Year Treasury Constant Maturity Chart 10-Year Treasury constant maturity — long-term interest rate chart for cycle context. Source: PSE Video

Money Flows in Bonds 2010– Money flows in bonds — tracking bond market flows against cycle phases. Source: PSE Video

Interest Rates Informational Slide Interest rates and markets — how interest rates interact with the real estate cycle. Source: PSE Video

Federal Reserve System Slide Federal Reserve system — PSE context on how Fed policy relates to cycle timing. Source: PSE Video

PCE Inflation and Fed Funds Rate PCE inflation and Fed Funds rate — current cycle inflation/rates comparison chart. Source: PSE Video

Graph View

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