Lessons from yield curve history

Stocks were under pressure for much of August as U.S.-China trade tensions escalated, with Washington and Beijing announcing escalating rounds of tariff increases. Worries over the economic outlook rose, highlighted by a Treasury rally that sank yields and resulted in an inversion of the main measure of the U.S. yield curve, with the 10-year yield falling below the 2-year rate—a phenomenon viewed as an often reliable recession indicator. Markets tend to keep moving higher immediately following a yield curve inversion. Since 1978, the S&P 500 has risen an average of 13% from the first time the spread inverts on a closing basis to the beginning of a recession, according to Dow Jones. Since 1956, past recessions have started on average around 15 months after an inversion of the 2-year and 10-year yields. Of course, past performance cannot guarantee future returns. Even if the yield curve means a recession is on the way, that shouldn’t necessarily be a red flag for investors. Contrary to what you might think, stocks actually rose during half of the last 14 recessions, and they were positive in 11 out of the 14 years leading up to a recession. The stock market was down a year

September 4, 2019 No Comments

Staring down the yield curve

For the time being, uncertainty will probably hang around like a dark cloud over markets. But that doesn’t mean you should head for the hills. The global economy has started to stagger. Earlier this week, the U.S. stock market tumbled after a historically reliable predictor of recessions flashed a warning signal. Some of the world’s largest economies are either slowing or contracting, including China, Germany, and the United Kingdom. Clearly, there’s a lot going on around the world. What’s a yield curve? And why should I care? The stock selloff on Wednesday was caused by a development in the bond market called a yield curve inversion, which means that the yield–or return–on short-term U.S. bonds exceeded that of long-term bonds. The government needs to pay out higher rates of interest to attract investors to its long-term bonds. The usual pattern is the longer-dated the bond, the higher the yield. But with so many losing confidence in the near-term prospects of the economy and rushing to buy longer-term bonds as a safe haven, investors crowded into bonds, driving up their price and pushing down the yield on the 10-year Treasury note (bond prices and yields move in opposite directions). The result:

August 16, 2019 No Comments