Yield Curve Inverts

Girls & boys, its time to go defensive. The yield curve has inverted…winter is coming…

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image

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Discounted stock, can’t wait image

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Yeah, given I’m new to this, haven’t a huge portfolio and in it for the long term, I’m just excited about discounted rates :slight_smile:

It’s the 2 year and 10 year inversion that have historically more meaningful correlations to market recessions. But it’s true, not a rosy picture!

Interesting comment from Mark Cudmore (Bloomberg macro strategist and the Managing Editor of the Markets Live blog):

“There’s a lot of misplaced excitement over Friday’s U.S. yield-curve inversion. So many are referencing it as strong evidence of an imminent recession – the reality is it hasn’t proved a particularly timely predictor. Sure, the inversion in February 2006 signaled a coming U.S. recession… 22 months in advance! Maybe that’s considered timely for academics – but not for traders. Similarly, the April 2000 inversion preceded the subsequent recession by 11 months. The September 1998 inversion proved a false alarm, and an inversion first occurred 14 months before the 1990 recession. So, over the past 35 years, even when it was a true positive, the average lead time was more than 15 months. To improve the signal, wait for the curve to invert by 25bps and subsequently re-steepen to +50bps. That predicted the three recessions with an average lead time of 4 months and provided no false positives. That timing is far more in synch with the related stock market peaks that have come and significantly more useful for traders.In summary: fear the significant re-steepening after a proper inversion; don’t fear a temporary small inversion”.

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Here’s some more details about why the curve inverted -

CQS Hedge Fund Says Curve Inverting on Technicals Won’t Last - Bloomberg

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Haha that was brilliant thanks for sharing. I loved the 22 months being relevant for academics line. As a former academic it landed.

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Nice explainer for the layman:

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