A new economics paper on the yield curve

Which Jim Hamilton points us to. It is going to be a slog for me to read, but I will.

Before I do, I can express my view on the yield curve. First, the yield curve for any economic good attempts to be minimum phase. What I mean is that internal to the firm or household, inventories are designed to minimize shortages. This means that phase differences between incoming and outgoing goods flow is minimized. In signal processing, we call this minimum phase, and this internal management shows up on the visible yield curve as a minimum phase curve, there are no inversion, no obvious arbitration opportunities.

Second thing I want to notice is that the negative term portion of the yield curve is missing. These are the "planned" losses, and would show up on the right side of the yield graph, which we never print. These do not show up because they are realized right away. Long bond losses  are taken as lower yields to the left on shorter period terms. We recognize long term losses right away, in the short term.

Hence, the curve we see is a compressed version of the full spectrum. Complex values disappear because of minimum phase, and negative terms folded over into absolute value terms on the positive side.  The bankers yield curve is a compressed representation of GDP over time, compressed to a precision that I think is biologically determined.

Tight and loose money

The yield curve recast as frequency rather than period

I don't use the terms "tight and loose", because the do not always correspond to interest rate cycles. Sometimes the Fed may be into an interest rate hike regime, but still trying to be loose, it is just that the longer end of the curve is looser.

One way to get at loose or tight is to look at the shape of the curve to see if the Fed is keeping the short end "kinked" down from the rest of the curve(loose) , or whether the Fed has the short end kinked up (tight).

Another reason I don't like the terms is that often the Fed is often trying to tighten, but is invariably late in its rate hike schedule, (and visa versa), so one does not know whether the Fed is trying to be slightly loose, or simply out gunned by the bond dealers.

So, why have I recast the yield curve above in the new format?

Because most of the theorems of frequency analysis are cast as a frequency spectrum. Hence, the three month term become 4 terms/year, the rate at which someone can make and pay off two consecutive two year terms. One tenth of a ten year term is managed in one year, and so on. The first thing to notice is that the very long string from 2 terms/year to 4 terms per year is the area that the Fed deals with, a long string. The second thing to notice is that the curve seems smoother, and more Normal shaped, something we cannot see in the standard form. Finally, look at the zero term. That is the yield on property if one pays for it over an infinite period, basically its rent.

One more thing, 3/4 of the yield spectrum is missing, held as internal information.

That is all for now.