It’s Back: Beware of the Inverted Yield Curve

December 5, 2018 at 9:07 am Leave a comment

One of the many things that spooked Wall Street yesterday was the return of the dreaded inverted yield curve. Specifically, on Monday, Bloomberg reported “the spread between 3- and 5-year yields fell to negative 1.4 basis points , dropping below zero for the first time since 2007, and the 2- to 5-year gap soon followed.” Why does this matter?

Well, you folks know a lot better than I do that from a banking perspective as the yield for shorter term bonds rises faster than the yield on longer term bonds, you end up in a classic squeeze of your operating margins making it more difficult to generate money off member funds. In addition,  the yield curve has an uncanny knack foredicting a coming recession, which makes sense because the higher yield being demanded for shorter term investments means that investors would rather put their money where they can lock in returns for the next few years.

Remember there is also a huge safety and soundness/interest rate risk component to all this. I would expect your examiners to be scrutinizing your knowledge of your interest rate risk exposure in the next round of examinations even more so than usual.

By the way, the inverted yield curve is coming at a time when things on the international stage may once again have a potential impact on the American economy. Just as the Greek debt crisis in the fear of that country opting out of the Euro produced economic reverberations throughout the international economy, we will have to wait and see just how big of an impact England’s inability to decide on divorce terms with the European Union will have on world economic growth.

By the way, British Prime Minister Theresa May, may go down as one of the worst politicians ever. A vote on the plan she negotiated with Europe establishing the terms of England’s post-Brexit relationship with Europe is expected next week and has so far been about as well received as year old candy on Halloween. It’s so bad that the one thing opponents and proponents of Brexit agree on is that Britain would be better off with no Brexit deal than the one being offered by May. That’s quite the trick.

New York’s Economy Continues to Grow But Gaps Remain

Closer to home, the New York Federal Reserve Bank released its latest analysis of the New York economy and if you’re a downstate credit union finding it hard to fill positions you’re not alone. According to the bank, “Employment in New York City is up about 25 percent from its trough following the Great Recession, which is considerably more than the nationwide increase. Meanwhile, upstate New York has not fared as well. Albany had seen solid job growth through much of the expansion, but growth has slowed over the past year. In Western New York, after years of modest employment gains, Buffalo and Rochester have seen job growth slow considerably since 2016.” One can only wonder just how much more the Upstate and Downstate economies will diverge once Amazon moves into town.

OCC: New York DFS Jumped The Gun On FinTech Litigation Again, New York Responds “Not So Fast”

In this letter to the court, the OCC explained that DFS’s lawsuit must be dismissed because no harm has been suffered by anyone since no FinTech Charter has been issued. Meanwhile, the CU Times reported that DFS has responded to this allegation by asking the court to block the OCC from approving any FinTech Charters before the litigation is resolved. Stay tuned, at some point we will actually have extremely important litigation defining the parameters of the OCC’s chartering powers and helping to frame an important public policy debate about how best to regulate hybrids of banks and technology companies.

Entry filed under: Economy, Legal Watch, New York State, technology. Tags: , , , , .

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Authored By:

Henry Meier, Esq., General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association. In addition, although Henry strives to give his readers useful and accurate information on a broad range of subjects, many of which involve legal disputes, his views are not a substitute for legal advise from retained counsel.

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