Displaying items by tag: yield curve

(New York)

The current fixed income environment is very challenging. The yield curve continues to flatten, and long-term yields have stalled, yet could move higher at any point. One great way to play the situation is through floating rate notes and funds. One floating rate fund that has been very successful is the American Beacon Sound Point Floating Rate Income, which has a 5.7% annualized return over the last five years. This year it has returned 4.5% versus Vanguard Total Bond Market Index’s -0.1%. The fund specializes in floating rate bank loans, so the higher rates go, the more those loans pay.

FINSUM: Floating rate notes and funds seem like a really good approach in the current environment, and this one might be an excellent choice.

(New York)

Right now everyone seems to be focusing on the possibility of an inverted yield curve occurring between the 2 and 10-year Treasury. However, that might not be the best recession predictor after all. If you are strictly focusing on yields, then the 1 and 10-year is better, as it gives less false positives. But speaking more broadly, the M1 money supply and housing starts are other great places to look as both tend to peak well before a recession; M1 is usually about a year, and housing starts two years.

FINSUM: The reality is that if you take a broader view, things don’t look too bad. M1 is still growing, as are housing starts, so those indicators look healthy.

(New York)

We have been hearing it for a couple of months now—it is time for financial stocks to shine. Yet, financial shares are having a pretty poor year. The reason appears to be the flattened yield curve. However, a new academic study finds that it is not primarily the yield curve, but rather short-term rates alone that dictate most of financial share performance. The spread between government and corporate bonds is also a factor. Looking at historical performance of financials as compared to rates, it seems like financial shares are about 9% below their fair value.

FINSUM: As our readers will know, we are not fond of historically-driven strategies, but we do give this one credit in that it is finally a new way of looking at the situation in bank shares.

(New York)

The flattening yield curve is an indicator of a recession and bear market to come. The last six US recessions have all been preceded by an inverted yield curve. Now it is happening again. The gap between two- and ten-year Treasuries was just 34 basis points last week, the lowest since 2007, or the eve of the worst American recession in almost 80 years. A few factors seem to be guiding the flattening. The first is the Fed’s bullish outlook on the economy and hawkishness on rates. The others are very weak inflation expectations over the long term as well as large demand for even modest long end yields, both of which have combined to keep ten-years pinned for some time now.

FINSUM: Yes a flattening yield curve is a bad sign, but remember that it takes, on average, several months (i.e. ~18 months) from when the yield curve inverts to when the economy actually goes into recession, with stocks historically continuing to rise along the way.

(New York)

A flattening yield curve is almost universally seen as bad news, and with good reason. A flattening curve is one of the most reliable recession indicators, with a yield curve inversion successfully portending the last six recessions. Now that we are close to an inversion, experts are weighing on how to play it. One thing to remember is that the peak in stocks tends to not come until several months after the inversion itself, so it is not an immediate divestment indicator. One analyst from Canaccord Genuity says to get overweight “financials, info tech and industrials with an intermediate-term time horizon”. Utilities and REITs are another area to look.

FINSUM: A flattening yield curve is going to be frightening to everyone, especially in the current environment, so our own view is that the peak in stocks may be much nearer to the inversion this time (or it might have already happened).