Displaying items by tag: yield curve

(New York)

What is the biggest short-term risk to markets? Is it a recession, China trade relations, and EU meltdown? None of the above. Rather, it is the upside risk of better economic data. A short burst of good US economic data, and the resulting comments from the Fed, could send US bond markets into a tailspin after the huge rallies of the last several weeks. The market for long-term Treasuries looks overbought, which means a reversal in economic data could bring a lot of volatility which could even whiplash equities.


FINSUM: At this point, a round of good economic data, and a stray hawkish comment from the Fed, would deeply wound bonds and hurt equities too (because everyone would again grow fearful of hikes).

Published in Bonds: Treasuries
Friday, 29 March 2019 11:34

The Best ETFs to Play the Yield Curve

(New York)

The yield curve is the center of attention right now. The short end is yielding more than the long end, everything feels upside down. So how to play it? Yields on long-term bonds have fallen so steeply that it seems foolish to think they will continue to do so. Inflation is still around and the Fed still has a goal to get the country to 2%, which means yields seems more likely to rise than fall (unless you think a recession is imminent). Accordingly, there are two ways to play this curve. The first is to use a “bullet” strategy by buying only intermediate term bonds, which tend to do well when the yield curve steepens, especially if short-term rates actually fall. For this approach, check out the iPath U.S. Treasury Steepener ETN (STPP). The other option is to remain agnostic as to direction, buying something like the iShares Core U.S. Aggregate Bond fund (AGG).


FINSUM: Our own view is that we are not headed into an immediate recession, and thus the long end of the curve looks overbought.

Published in Bonds: Treasuries

(Washington)

Yield curves are widely known to be the best indicator of forthcoming recessions, hence why the market is spooked. However, a lesser known fact is that they are also good indicators of presidential elections. Looking historically, whenever the yield curve is inverted at the time on an election, the incumbent loses. This occurred in 1980 in Reagan’s victory, as well as in the 2008 election of Obama. Both times, the yield curves were inverted and the economy in recession. That said, flat yield curves don’t seem to have much effect at all and hold little advantage for either party.


FINSUM: Given that recessions usually take 12 to 18 months to start once the curve inverts, it is entirely possible that one could begin just before the 2020 election.

Published in Politics
Monday, 25 March 2019 12:20

What the Yield Curve Inversion Really Means

(New York)

The professor who first identified yield curve inversions has written an article explaining what the development really means. First identified in 1986, a yield curve inversion is considered the most widely accurate indicator of recession. Since it was first identified and back tested, it has accurately predicted a further 3 out of 3 recessions. This is a point its “discoverer” Campbell Harvey hammers home in his article. He explains that an inversion is usually followed by a recession within 12-18 months. The yield curve has not been inverted since before the Crisis, but just did so on Friday.


FINSUM: One of the important points Harvey makes is that in order for the inversion to really indicate a recession, it needs to remain in place for at least three months. We are only at one day.

Published in Bonds: Total Market
Friday, 22 March 2019 12:18

The US Yield Curve Just Inverted

(New York)

It finally happened. After dangling on the edge of an inversion for months, the US yield curve has just officially crossed into one. The gap between 3-month and 10-year Treasury yields is now negative. 10-year yields have been falling, recently hitting a low of 2.439%. Yield curve inversions are seen as the most reliable indicator of forthcoming recessions. Yields have been falling as a reaction to a highly dovish Fed and weakening economic data.


FINSUM: This is a reason to worry about he economy, but remember that there is often a long lag between an inversion and a peak in the stock market.

Published in Bonds: Total Market
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