An Interesting Tidbit About the Inverted Yield Curve
Inverted yield curves (shorter yields higher than longer yields) generally predict a recession is coming. Besides the fact that the current yield curve is actually a "second coming" (It inverted some months ago, reversed, now inverted again). we noticed an interesting tidbit about the current inverted yield curve recently. We'll get to that in a moment.
Since the current inverted yield curve has gotten some media traction, a client asked about it: Is an inverted yield curve bad for the market? (He meant "stocks"; as a rule, people will say "market" when they mean "stock market.") So what's the answer?
Likely, it will be bad for stocks - with "will" meaning at some point in the not-too-near future.
An inverted yield curve can predict recessions and stock market corrections - or worse. But the two don't necessarily happen in tandem. There are examples where a yield curve has inverted and a recession has already begun - but no one recognizes the recession. In fact, many recession begin without notice. It's not uncommon for recessions to be recognized months, or even more than a year, after they've actually begun.
As for stocks, the picture a little clearer: It's not normal for stocks to tank when a yield curve inverts. It takes time. It could, in fact, take months or more than a year for stocks to get the message and turn down.
None of this allays the fears of those focused on the inverted yield curve. May showed us that. The stock market dropped around 7%. That's less than the tumble in the fall. But still, you had a healthy contingent of investors' knees knocking through the not-so-merry month of May. Indeed, the AAII investor survey showed bear sentiment at a high 40%+. Naturally with bear sentiment soaring, stocks reversed and had their best week of the year last week. But that's another story.
Back to the yield curve. It's not simple science. But it's useful to monitor.
Now the tidbit:
The typical definition of inverted compares the 30-month T-Bill with the 10-year T-Note (i.e., treasury securities). And there the inversion has expanded. But we've learned to also check the 2-year with the 10-year. One source we follow claims that's really the better ratio for predicting recessions and stock flops. But whether that's true or not, following it reveals some interesting:
While the 3-month yield is higher than the 10-year (inverted), the 2-year is not - which means it's not showing an inverted yield curve.
What to make of this?
Suggestion: It tempers or hedges the concern about the inverted 3-month/10-year curve.
So with that in mind, we don't conclude stocks are on the verge of a BIG collapse, or anything like that. We'll simply keep monitoring. And when the 2-year does invert compared to the 10-year, that will tell us to be hyper-vigilant instead of just vigilant.
As for a recession, well, maybe one's begun, maybe not. Frankly, we're focused more on the stock market.
Since the current inverted yield curve has gotten some media traction, a client asked about it: Is an inverted yield curve bad for the market? (He meant "stocks"; as a rule, people will say "market" when they mean "stock market.") So what's the answer?
Likely, it will be bad for stocks - with "will" meaning at some point in the not-too-near future.
An inverted yield curve can predict recessions and stock market corrections - or worse. But the two don't necessarily happen in tandem. There are examples where a yield curve has inverted and a recession has already begun - but no one recognizes the recession. In fact, many recession begin without notice. It's not uncommon for recessions to be recognized months, or even more than a year, after they've actually begun.
As for stocks, the picture a little clearer: It's not normal for stocks to tank when a yield curve inverts. It takes time. It could, in fact, take months or more than a year for stocks to get the message and turn down.
None of this allays the fears of those focused on the inverted yield curve. May showed us that. The stock market dropped around 7%. That's less than the tumble in the fall. But still, you had a healthy contingent of investors' knees knocking through the not-so-merry month of May. Indeed, the AAII investor survey showed bear sentiment at a high 40%+. Naturally with bear sentiment soaring, stocks reversed and had their best week of the year last week. But that's another story.
Back to the yield curve. It's not simple science. But it's useful to monitor.
Now the tidbit:
The typical definition of inverted compares the 30-month T-Bill with the 10-year T-Note (i.e., treasury securities). And there the inversion has expanded. But we've learned to also check the 2-year with the 10-year. One source we follow claims that's really the better ratio for predicting recessions and stock flops. But whether that's true or not, following it reveals some interesting:
While the 3-month yield is higher than the 10-year (inverted), the 2-year is not - which means it's not showing an inverted yield curve.
What to make of this?
Suggestion: It tempers or hedges the concern about the inverted 3-month/10-year curve.
So with that in mind, we don't conclude stocks are on the verge of a BIG collapse, or anything like that. We'll simply keep monitoring. And when the 2-year does invert compared to the 10-year, that will tell us to be hyper-vigilant instead of just vigilant.
As for a recession, well, maybe one's begun, maybe not. Frankly, we're focused more on the stock market.
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