Curve Watchers Anonymous is once again taking a look at the yield curve looking for economic clues. Here are a few charts to consider.



Yield Curve Timeline from 2000-2010







click on any chart for sharper image



Green: $TYX - 30 Year Treasuries

Orange: $TNX - 10 Year Treasuries

Blue: $FVX - 5 Year Treasuries

Brown: $IRX - 3 Month Treasuries



Area 1: Inverted Yield Curve Signals Pending DotCom Bubble Burst

Area 2: Fed Reflates Holding Interest Rates at 1% for 18 Months Fueling Mother of All Credit/Housing Bubbles

Area 3. Yield Curve Tight for Two Full Years, Inverted on and off for 18 Months. This was the Mother of All Warning Signals. Few Paid Attention. Bernanke Said "No Recession Coming. No Housing Bubble to Bust"

Area 4. Fed Reflates, Cutting Rates to Zero.



Interest Rate Spread 1977-2010







Interest Rate Spread 1977-2010 Percentage Basis







Interest Rate Spread 1977-2010 Percentage Basis Detail







The first chart above I produced in eSignal. The next three charts are courtesy of Jay Matthews at Velocity Capital.



Credit Not Expanding



Under normal circumstances with a steep yield curve, banks would be willing to borrow from the Fed at close to zero and lend at prime or higher.



Yet we know that banks are reluctant to lend (more accurately businesses are reluctant to borrow) as mentioned many times, most recently in As Credit Contracts, Keynesian and Monetarist Clowns Snipe at Bernanke.



Total Bank Credit Drops At Record Pace



What has everyone excited is the dramatic turn down in bank credit at commercial banks.



From the Telegraph article ... David Rosenberg from Gluskin Sheff said lending has fallen by over $100bn (£63.8bn) since January, plummeting at an annual rate of 16pc. "Since the credit crisis began, $740bn of bank credit has evaporated. This is a record 10pc decline," he said.



Total Bank Credit Of Commercial Banks







In contrast to Keynesian and Monetarist clowns, I am not horrified by that drop. I am horrified by the parabolic rise that preceded it.



That credit is plunging is a good thing, not a bad thing. A much needed deleveraging is in progress. The question now is: Will Bernanke have the courage to see this [policy normalization] through or not?



This Is Not 2003-2006

Hello Mish



After our phone conversation last week, I thought of one more important banking tidbit you might want to share with your readers.



If you’re a bank with a relatively healthy balance sheet with adequate capital, (like us)you want to maintain surplus capital in order to stay on the FDIC’s list of banks they can transfer the loans and deposits from a failed institution into.



This is a home run for the acquiring bank and far more of an instant benefit than any new lending.

Is It Different This Time?