Sign up today for an exclusive discount along with our 30-day GUARANTEE — Love us or leave, with your money back! Click here to become a part of our growing community and learn how to stop gambling with your investments. We will teach you to BE THE HOUSE — Not the Gambler!

Click here to see some testimonials from our members!

Yield Curve Steepest In 14 Months: What Happens Next

Courtesy of ZeroHedge View original post here.

The Fed, reportedly, took action in 2019 – with its massive flip-flop, cutting rates drastically and expanding its balance sheet at the fastest pace since the financial crisis -  in order to ‘fix’ the yield curve which had dropped into the media-terrifying inverted state… but what investors (and The Fed) appear to have forgotten (or choose to ignore) is that it is now much more concerning.

The last few months have seen the yield curve steepen dramatically, up 35bps from August’s -5bps spread in 2s10s to over 30bps today – the steepest since October 2018…

Source: Bloomberg

That is great news, right? No more recession risk, right?

Wrong!

Source: Bloomberg

While investors buy stocks with both hands and feet, we take a look at how risk assets perform after the curve flattens and/or inverts. According to backtests from Goldman, while risky assets in general can have positive performance with a flat yield curve, risky asset performances tend to be lower. This is consistent with Goldman’s base case forecast combining low (but positive) returns from here given the lack of profit growth and a less favouable macro backdrop.

What is far more notable, as we showed most recently last July, is that since the mid-1980s, significant stock drawdowns (i.e. market crashes) began only when term slope started steepening after being inverted.

And remember, the yield curve’s forecasting record since 1968 has been perfect: not only has each inversion been followed by a recession, but no recession has occurred in the absence of a prior yield-curve inversion. There’s even a strong correlation between the initial duration and depth of the curve inversion and the subsequent length and depth of the recession.

So, be careful what you wish for… and celebrate; because as history has shown, the un-inverting of the yield curve is when the recessions start and when the markets begin to reflect reality.

 

Do you know someone who would benefit from this information? We can send your friend a strictly confidential, one-time email telling them about this information. Your privacy and your friend's privacy is your business... no spam! Click here and tell a friend!





You must be logged in to make a comment.
You can sign up for a membership or get a FREE Daily News membership or log in

Sign up today for an exclusive discount along with our 30-day GUARANTEE — Love us or leave, with your money back! Click here to become a part of our growing community and learn how to stop gambling with your investments. We will teach you to BE THE HOUSE — Not the Gambler!

Click here to see some testimonials from our members!