Messages from the Market

One term spread steepens sharply; only one spread has actually inverted. The five year inflation breakeven is falling. And risk is rising.

Figure 1:  Ten year-three month Treasury spread (blue), ten year-two year spread (red), both in %. Source: FRB via FRED, Treasury, and author’s calculations.

Spreads have increased recently, so peak recession probabilities from plain vanilla 12 month ahead probit models are 31% and 39% for August 2023.

Inflation breakevens have experienced a startling descent, if calculated naively using unadjusted Treasurys and TIPS (at 5 year horizon). However, after adjusting for risk and liquidity premia, we see a different story — although the conclusion is much the same.

Figure 2:  Five year inflation breakeven calculated as five year Treasury yield minus five year TIPS yield (blue), five year breakeven adjusted by inflation risk premium and liquidity premium per DKW (red), both in %. Source: FRB via FRED, Treasury, KWW following D’amico, Kim and Wei (DKW) accessed 9/7, and author’s calculations.

Expected inflation over the 5 year horizon averages around 2.3-2.4%, but the adjusted series shows a slower constant ascent since the expanded Russian invasion of the Ukraine.

What about perceived risk? The VIX and a conventional bond spread — Moody’s BAA-10 year Treasury spread — moved in lockstep. Until mid-August, when the last peak in the SP500 occurred.

Figure 3:  BAA-ten year Treasury spread, % (red, left scale), VIX (chartreuse, right scale). Source: Fed, CBOE, via FRED, and author’s calculations.

Since then, the VIX has risen as equity markets have declined. Increasing perception of risk is for the moment localized to the equity market.

19 thoughts on “Messages from the Market

  1. Macroduck

    Utterly, wildly off topic, Book Banning –

    In the quest for higher standards for children’s books, there is no standard. Any book than annoys anybody can end up being banned. Among the insidious, values-threatening reads that tweens ought never lay eyes upon is the series “Girls Who Code”. apparently because it encourages girls to code:

    Government by grievance can involve some really petty grievances.

  2. Macroduck

    Perception of risk is perhaps limited to financial markets, broadly defined. The MOVE index is quite high:

    So is the dollar volatility index:

    In each case, realized volatility is a large factor in driving the index, apart from any additional perception of future risk. There may be a formal method of extracting realized volatility from futures market priced-in volatility, but if there is, I’m not aware of it.

  3. ltr

    September 27, 2022

    Bumper harvest in sight with help of agricultural technologies

    TAIYUAN — On the Yellow River tidal flat, 20 combine harvesters shuttled across 10,000 mu (about 666.67 hectares) of maize fields as September draws to a close.

    Unlike in the past, harvested corn is now sent to a yellow tower-shaped dryer before being transported to the granary.

    The newly purchased dryer has helped reduce losses of harvested corn, said Chen Yifan, the person in charge of the farmlands in Hejin City, north China’s Shanxi Province.

    He added that due to the introduction of water-saving and drought-resistant varieties and the utilization of water-saving technology to adapt to the tidal flat’s sandy soil, corn yield per mu increased by 120 kg this year.

    Technology has played an increasingly prominent role in China’s agricultural development. Official data show that the country’s mechanization rate of crop cultivation and harvest has exceeded 72 percent.

    A bumper autumn harvest is already in sight. According to the latest survey by the Ministry of Agriculture and Rural Affairs, this year’s autumn grain area is expected to keep increasing, with good growth in most parts of China.

    Farmers around the country are utilizing intelligent tractors, smart combines, and drones in the farmlands to effectively reap the crops.

    In the villages under the administration of Gaoping City in Shanxi, more than 500 sets of agricultural machinery have been used during this year’s autumn sowing, tillage and harvest of 450,000 mu of corn.

    “The harvesting efficiency of modern agricultural machinery is more than 20 times that of manual harvesting,” said Wang Peiwen, a local farmer.

    Technology has given birth to modernized planting methods. In an unmanned farm in Zibo City, Shandong Province, a soil moisture sensor installed 30 cm underground collects information 24 hours a day.

    “Plot No.1 is short of water, please water it,” the sensor sent an alert to a cloud-based smart platform at the farm, and after automatic assessment, a sprinkler immediately started precise watering at the targeted plot.

    Prolonged heat and drought swept many parts of China this summer, and technology has proved to be a powerful tool to ensure stable autumn grain production.

    Central China’s Hubei Province has reaped benefits from accelerating the popularization of new locally-developed hybrid rice varieties which produce high yields and are resistant to diseases, lodging and high temperature…

    1. ltr–1dxvwcnmFQ4/index.html

      September 22, 2022

      Chitin biosynthesis study sheds light on green pesticide development

      Chinese scientists have revealed for the first time the complete process of chitin biosynthesis, providing a new direction for the research and development of green pesticides, according to the Chinese Academy of Agricultural Sciences (CAAS).

      Chitin is the most abundant aminopolysaccharide on earth, and its biosynthesis is essential for the survival and reproduction of a number of organisms, including pests, pathogenic fungi, and oomycetes that harm crop production. Meanwhile, it is an ideal molecular target for the development of green fungicides or insecticides.

      The core of developing safe pesticides with a new mechanism of action lies in pesticide molecular targets. However, little is known about the mechanism of chitin biosynthesis in previous studies.

      “A specific pesticide molecular target may give birth to dozens or even hundreds of new pesticides,” said Song Baoan, academician at the Chinese Academy of Engineering (CAE) and president of Guizhou University.

      Scientists from CAAS’s Institute of Plant Protection studied PsChs1, a chitin synthase from Phytophthora sojae, the main pathogen causing soybean rhizome rot, and revealed the whole process of chitin biosynthesis for the first time.

      “The research is a milestone … It will help to increase green pesticide varieties, improve the core competitiveness of China’s pesticide industry and the ability to prevent and control pests, so as to ensure food security,” Song added.

      Qian Xuhong, academician at the CAE and president of East China Normal University, said the research has “broken through a bottleneck in the field of chitin pesticides in the past 50 years,” and it is “one of the most important fundamental advances in global pesticide innovation research and development.”

      The study * was published in Nature on Wednesday.


    2. Anonymous

      i think the off stalk drying is standard practice in the usa.

      i have not been near corn farms for years, but i was in western nys in a corn growing area.

      beautiful corn and soy bean fields.

      unlike 40 odd years ago the soy bean field have no “volunteer corn” that i saw.

    3. ltr

      September 26, 2022

      Chinese-led study discovers plants use key protein to sense nitrate

      A key protein acts as a primary nitrate sensor for land plants, according to a Chinese-led study * published in the journal Science on Thursday.

      Nitrate is an essential nutrient and signaling molecule for plant growth. Plants sense intracellular nitrate to adjust their metabolic and growth responses. In agricultural production, nitrate is an important factor that increases crop yields.

      Researchers from China’s Northwest Agriculture and Forestry University (NWAFU), Harvard Medical School and the University of Tokyo found that NIN-like protein 7 (NLP7) serves as both nitrate signal switch and nitrate receptor.

      They also developed fluorescent nitrate receptors to observe nitrate levels and changes in plants at the cellular level.

      According to the NWAFU, the study illustrates “the regulatory mechanism that photoautotrophic plants use to activate the plant signal transduction network” and “growth response by sensing nitrate.”

      The study will provide new insights to help improve nitrogen use efficiency in crops, reduce fertilizer use and energy consumption, mitigate climate change caused by greenhouse gas emissions, and support sustainable agricultural development, said the university.


      1. baffling

        why do you only post articles promoting china? that is a racist approach ltr.

        prof. chinn, may i recommend banning links to ccp propaganda sites? in my view, they are different from your typical political propaganda sites. they are funded and organized by a foreign entity with an explicit interest in impacting the domestic polices of another nation. foreign agents are prohibited from influencing domestic politics in the united states. these ccp sites are trying to do exactly that.

      1. Baffling

        That is why we have state and federal supreme court. To address such issues. There are limits to what can be passed and enacted by a legislature. Didnt uou learn anything in your middle school American government class?

        1. Anonymous

          recondite definition of democracy where a judge, with an obedient armed law enforcement mob, appointed by an out of office president can determine the will of the people!

          i will remember this when i hear biden defending his democracy!

          1. baffling

            anonymous, i suppose they did not teach american civics during your soviet education, so perhaps you get a small pass here. but the us constitution defines three separate government powers (executive, legislative and judicial) with a system of checks and balances, to address your concerns. before you criticize another nations laws and democracy, perhaps you should better educate yourself on their laws and government? otherwise, it simply makes you look like a troll from another nation trying to influence the usa.

          2. Noneconomist

            In a blog that has featured more than its share of ridiculous comments, Anonymous—without extending much effort—has risen to the top.

      2. Noneconomist

        Anonymous: you might want to look up “judicial review”.
        Whatever history you’ve studied—if any—-has obviously not prepared you for the real world.
        Personally, I’m baffled that any (adult?) reader of this blog would ask such a question unless he’s never studied U.S. history.

        1. baffling

          it’s doubtful they had a good elective offering for us history and government at the soviet university where he studied.

  4. Ivan

    Putin just blew up Nordstrom I and II natural gas pipelines in the Baltic sea between Russia and Germany. Reasons could be one or both of the following:

    1. He is out for the insurance money for a pipeline that is never going to be used for its intended purpose.
    2. He want to intimidate the west by demonstrating that he can destroy NG pipelines going from anywhere to anywhere under water.

    He does seem to have the idiotic delusion that Western Europeans are weak and will fold if they for some reason were to be faced with the potential of having to wear two pairs of socks and two sweaters indoors this winter. What he doesn’t seem to get is that the worse he makes it this winter the more likely that Europe will switch completely away from NG next winter and crash the markets for his main income producing products.

    Putin seems to always be ready to shot himself in the foot.

    1. Macroduck

      Two scenarios:

      1) Bunch of reasonably smart people in a room, spitballing ideas and figuring out which ones might work.

      2) Bunch of reasonably smart people in a room, but only one offers ideas, and the rest never criticize those ideas, because af the high incidence of falling out of windows.

      In one of these scenarios, invading troops get bogged down in the way to Kiev and end up being sliced to ribbons. I’m guessing the same scenario informed the decision to make Rusia an unreliable exporter of one of Russia’s main exports.

    2. baffling

      the more atrocities committed by putin and russia in ukraine, the more confident i am that the european community will cut back on heating and dress warmly for the upcoming winter as a common bond defense against russian aggression. and unlike some others on this site, i do not believe that europe can replace its NG from russia with other sources, now or in the future. in light of that, much of europe will continue to explore alternatives to NG in the medium and long run. that will leave russia with a NG marketplace of china and india. good luck with that.

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