Displaying items by tag: Treasuries

(New York)

There is a lot going against equities right now. A trade war, rising rates, a weaker 2019 earnings outlook, a fading tax effect, and high valuations. There is one more to add to the list, and it could end up being the worst of all—stocks are now yielding significantly less than short-term bonds. Two-year Treasuries are yielding 2.82% while the S&P 500 is yielding just 1.9%. Yields better than bonds had been an incentive for investors to put money in stocks for years, a phenomenon called “TINA”, or “there is no alternative”.

FINSUM: With all the volatility and headwinds facing equities, and relatively unattractive yields as well, it is hard to see what force is going to swoop in to help out stock indexes.

(New York)

Pay attention, the yield curve just inverted. And we are not talking about some esoteric swap rate most have never heard of. Yesterday the spread between two-and five-year Treasuries fell below zero, the first major inversion of this bull market. The 2- and 10-year spread is the most typical benchmark for gauging an inversion, but the 2- and 5-year is significant. Yield curve inversions are one of the most accurate predictors of recession, with one preceding the previous several recessions.

FINSUM: One very important thing to remember is that it often takes many months (or years) for a recession to begin once a yield curve starts, so there is still plenty of room for the economy (and markets) to run.

(New York)

With all the volatility of the last month, and midterms, less focus has been on one of the most ominous of economic signs—the yield curve. Well, Goldman Sachs has just weighed in, warning investors that a yield curve inversion is looming. Goldman went further than to say that 2-years might be flat or overtake 10-years, the bank said that spreads between 2- and 30-year bonds would fall to zero. To put that call into perspective, it would be a narrowing of 50 basis points versus now. Goldman highlighted the move in its top themes to watch for 2019.

FINSUM: We have to give Goldman Sachs a little credit here as they have been consistently hawkish about rates for at least a year and are sticking to it. We tend to agree with this view.

(New York)

One of the safe bets during bouts of volatility since the Financial Crisis has been to pile into Treasury bonds anytime things got tough. Every time stocks dipped, the bonds tended to rally strongly and became a safe haven. However, since the recent downturn in equities, this correlation has ceased. Even amidst stock and oil’s plunges recently, Treasuries have basically remained flat, giving no comfort to investors.

FINSUM: The big difference this time around is that the volatility is coming during a period of rising rates, which means Treasury bonds are not as safe a bet as in the past several years.

(New York)

Here is something no one was calling for before the election—the yield curve has has flattened considerably since the midterm results. The spread between two- and ten-year Treasuries got as low as 25 basis points. The market thinks the US deficit may be tighter than in an all-Republican scenario, which has sparked a rally in ten-years.

FINSUM: A flattening yield curve on its own does not necessarily indicate recession, but if it does invert, look out, as that is one of the most reliable indicators of a looming slowdown.