At the close of Friday trading, the three month Treasury yield stood at 2.459 percent at the same time as the 10 year Treasury yield was at 2.437 percent per data from Refinitiv TradeWeb. Now this is an especially significant development for the key reason that Friday was the first time going back to 2007 that this spread has been negative or inverted. This chart tells the story:
The 10 year yield was largely to blame. Its decline took it to the lowest point in over a year, going back to January of 2018. In the last week’s sessions, world markets have taken significant hits on worries that a recession is at long last approaching. Unfortunately, this Treasury yield curve inversion has a long term accurate track record of predicting such disturbing economic trends.
These inverted yield curves occur as (comparable credit quality) longer term debt offers a lower yield (earnings on investment in a given period) than the shorter term version of it.
As investors anticipate stronger economies, yield curves will naturally slope upward. This stems from people accepting governmental IOUs being compensated with superior interest rates than other investors who loan the government money for only a few months. What causes the upward shape to alter is when investors become convinced that economic output and growth will instead decline.
Consider this example. If market players feel American industry will produce a lower amount of goods and services two years from now than it will in only two months, the curve would slope downward, inverting. This rise of the shorter term yields over the longer term ones is correctly carefully watched as a reliable predictor of recessions.
History is on the side of these inversion yield curves and their predictive powers as they have been incredibly accurate in forecasting such economic recessions. There is not any reason to believe that “this time things will be different” according to Credit Suisse’s Global Head of Equity Strategy Andrew Garthwaite. He warned:
“I think it is a clear warning signal. The last three occasions in the yield curve’s inverted, back in ’89, 2000, and 2006, on each occasion the majority of the people I’ve spoken to said, ‘Yes, this time, it’s different.’ And it wasn’t.”
What is more worrisome is that research compiled by Garthwaite demonstrated that the accuracy of such an inverted yield curve has allowed it to correctly forecast all private sector recessions over the past 52 years and to correctly call six of the last seven recessions.
Garthwaite’s silver lining is that you have some time to prepare your retirement portfolios from the coming recession, as he shared with:
“What I would say before we get too gloomy on it is, equities typically do well in the first six months after an inverse in the yield curve. Typically, the down market occurs 12 to 18 months after inverted yield curves. You’ve got a little bit of breathing space.”
Consider yourself fairly warned by the charts’ reliable yield curve indicator.
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