【Quant(18)】yield curve inversion

Recession ?

Photo by Mathilda Khoo on Unsplash

Highlights

  • Difficulty:★★☆☆☆
  • Advice: This article adopts TEJ API to get the data, Before reading this, we should familar with data visualization.

Preface

when the United States 10Y Government Bond -United States 2Y Government Bond <0 ,we call it yield curve inversion 。

Usually longer-term bonds will have higher interest rates, but when the market have doubts about the economy ,yield cruve inversion happen! So in this article , we try to plot the Macroeconomic Index a year before it happened, and two years after it happened

The Editing Environment and Modules Required

Window10 Spyder(anaconda31)

Database

macroeconomic data :macroeconomic data database code (GLOBAL/ANMAR)

#######################3
from datetime import datetime, timedelta
import pandas as pd
import numpy as np
import matplotlib.pyplot as plt
#########################3
import tejapi
import plotly.graph_objects as go
import plotly.io as pio
##################
pio.renderers.default = 'browser' ##PLOT IN WEB

Data Processing

our bonds data is from Tej pro

df=pd.read_excel("C:\\Users/user/Desktop/Tej/美國公債殖利率.xlsx")

There is Nan in our data , so we should drop it ,After we reset index

df.dropna(inplace=True)df.reset_index(drop=True,inplace=True)

step 1 set the indicator

df["dif2Y"]=df.US10Y-df.US2Y
df["invertkeepday"]=df["dif2Y"].apply(lambda x : 1 if x < 0 else 0 )
df["cross"]=np.nan
df["notcross"]=np.nan

calculate the 10y- 2y

find the inverse day and visualize it

startday=[]
endday =[]
keep = 0
df=df.copy()
for i in range(len(df)):
if df["invertkeepday"][i] >0 :
if keep == 0:
df["cross"][i]=df["US10Y"][i]
startday.append(df["日期"][i])
keep = 1
elif keep == 1 :
df["notcross"][i]=df["US10Y"][i]
if df["invertkeepday"][i] < 1 :
endday.append(df["日期"][i])
keep = 0

and we want to see how long did it happen

for start , end  in zip(startday,endday):print(start , end, end-start)

We found that some times were really close ,so we make them in a group

inverted=pd.DataFrame(endday,startday)
inverted.reset_index(inplace=True)
inverted["year"]=inverted["index"].dt.year
datetime=inverted.groupby('year')
datetime=list(datetime)
getstart=[]
getend =[]
for i in datetime :
i[1].reset_index(drop=True,inplace=True)
start = i[1]["index"][0]
end = i[1][ 0][len(i[1])-1]
getstart.append(start)
getend.append(end)
for start , end in zip(getstart,getend):
print(start , end, end-start)

Now we can see the approximately situation

Nearly three years we found that there have about 6 times yeild curve inverse

df.set_index("日期",inplace=True)plt.figure(figsize=(12.2,4.5))
plt.scatter(df.index,df['cross'],color='red', label='cross!',marker='x',alpha=1)
plt.scatter(df.index,df['notcross'],color='green', label='Notcross',marker='o',alpha=1)
plt.plot(df["US2Y"], label='2Y', alpha=0.35)
plt.plot(df["US10Y"], label='10Y', alpha=0.35)
plt.plot(df["dif2Y"], label='dif', alpha=0.35)
plt.title('Close Price Buy & Sell Signals')
plt.xticks(rotation=45)
plt.xlabel('Date')
plt.ylabel('Price')
plt.legend()
plt.grid()

Step 2 visualize the stocks

we have the time so we can input the time into Tejapi to get the macroecnomic data

1990
1990
1998
1998年
2000
2000年
2006
2006年
2019
2019年

Conclusion

From the perspective of various economic data, it may represent that the prosperity has passed its peak, so there are doubts about the future prosperity, selling short-term bonds and preferring longer-term bonds, which leads to the inversion of yield curves

Although every time an inversion occurs, it will be accompanied by an recession, but in these five expreience ,there was two times that the U.S. economy has not experienced a recession within two years

In 2019, the recesion happen because of the COVID-19 , yield curve can’t forecast it !

1, In the past 5 inversion ,stocks go up 4 time

2, When three recessions occurred, they were all in a rate-cut cycle, and when two recessions did not occur, the U.S. was in a rate-raising cycle

What about now ?

At present, although the peak of the US economic data has passed, it is still maintain at a very high level. Because of the strong economic performance, the US Federal Reserve has entered a cycle of raising interest rates. Although each inversion will be followed by a recession, this indicator It is a very leading indicator. The past five inversions between the 2 Y and the 10Y have taken an average of 18 months before a recession occurs. Perhaps the inversion is trying to tell us

Hey ! it’s time to be aware of the risks

Extended Reading

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台灣經濟新報(TEJ)

台灣經濟新報(TEJ)

TEJ為台灣本土第一大財金資訊公司,成立於 1990 年,專門提供金融市場基本分析所需資訊,以及信用風險、法遵科技、資產評價、量化分析及ESG等解決方案及顧問服務。鑒於財務金融領域日趨多元與複雜,TEJ 結合實務與學術界的精英人才,致力於開發機器學習ML、人工智慧AI及自然語言處理NLP等新技術,持續提供創新服務

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