Displaying items by tag: inversion

(New York)

The yield curve narrowed continuously throughout most of 2018. The spread between 2- and 10-year Treasuries fell to just over 9 basis points in December and sits at 14 now. Where is it headed? The answer is likely towards an inversion. The Fed is releasing its minutes, and once it does, it seems likely the spread will continue to narrow. There are two scenarios that would likely create an inversion. The first is if the Fed minutes show that the central bank may raise rates again soon (sending short term yields higher). The other, and perhaps more likely, scenario is that the Fed expresses some anxiety about a recession (pushing long-term yields lower).

FINSUM: This is interesting because the two most likely scenarios for what the Fed might say/do in the near-term both add up to the same thing—a yield curve inversion.

(New York)

Banks are usually the last ones to forecast a recession. Saying things are heading south is usually not good for business. However, despite this a slew of major banks, including Goldman Sachs, JP Morgan, and BofA, are all saying that the risks of a recession in 2019 are rising. While they are still loath to say a recession will happen next year, JP Morgan just increased the odds considerably, saying there is a 35% chance. In March they said it was just 16%. Jobs data has just started to weaken, which is a warning sing, and the yield curve has begun to invert, another indicator of trouble ahead.

FINSUM: We know a recession is on the way, but the timing is the tough part. Our best bet is towards the end of 2019 or Q1 2020.

(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)

This is a day where investors need to take a deep breath. Markets are plunging, the yield curve just inverted, and there are major fears about the durability of the US-China “truce”. One thing to take heart in is that even though they are good predictors, a yield curve inversion doesn’t mean everything. It is important to note that it is the two and five-year Treasuries that have inverted, not the two and ten, which could mean this is just a temporary kink. For instance, in 1998, this pair turned negative without the rest of the curve following suit.

FINSUM: On top of the last point there, remember that inversions don’t cause recessions, they are just the market predicting slower long-term growth. That said, they seem to create self-fulfilling prophecies.

(New York)

Short-term bonds are looking like an ever better buy right now. Two-year Treasury yields are at 2.87%, up from 1.55% a year ago, and well over the 1.9% average yield of the S&P 500. That means the spread between the two- and ten-year notes is only about 28 basis points. Considering the latter has significantly more rate risk, two-year bonds like a good bet right now.

FINSUM: There are many ultra short-term bond funds out there to choose from. Actually, given the breadth of ETFs in the space, there has never been a better or cheaper time to play defense in this kind of rate environment.