The Yield Curve

As if we need more confirmation we're in trouble:



The chart shows the spread between (average) interbank rates for overnight, 1 week and 1 month money. While the spread between overnight and 1 month money was flat throughout 2008, the spreads between overnight and 1 week against 1 month money both turned negative in November and January 2009. In other words, money is cheaper in the future than it is right now, or equivalently demand for money now is higher than demand for money in the future. From a term structure perspective, the yield curve (the ranking of interest rates based on maturities), which would normally be upward sloping to reflect risk and inflation expectations, has inverted. The interpretation for a yield curve that gets flatter can vary depending on the situation, but generally follow along these lines:

1. The market is pricing in an interest rate cut
2. The market is expecting deflation/reduced inflation
3. The market for whatever reason desires short term liquidity

An inversion of the yield curve is more serious, and is usually taken to be a recession signal. Admittedly I'm basing this on just a couple of data points, but given the other data, I'd take this as weak confirmation we're in a technical recession. For comparisons sake, here's the situation around 1997:

Please note the differences in scale between this chart and the previous! If anybody's wondering why I haven't charted any maturities longer than 1 month, it's because the market for 3 month and longer terms has almost completely dried up.

In complete contrast, spreads in the market for MGS have widened instead:



This represents the long end of the money market, looking at spreads between the indicative yield of 1 year MGS against 5, 10, and 20 year maturities. Off the top of my head, I'd say the market is pricing in the likelihood of higher government borrowing (which would raise yields) as well as a flight to the short end, though not yet looking at potential higher future inflation.

Update:

satD asked for the risk premium between the interbank market, BNM Bills and Treasury Bills, but it's not terribly informative:



The empty spaces in the chart reflect lack of trades in those periods, especially in the interbank market. There is however, further proof of flattening/inversion in the yield curves of both BNM bills and T-bills (spreads are between 3 month and 6 month maturities):





I'm not even going pretend to know what went on in 2005 for T-bills, though (there's also another sharp downward spike in late 2004).