How Relevant Is The Yield Curve Inversion?
2022.04.03 07:37
Yield curve inversion conversations are dominating the media to the point it almost sounds like the start of a bad joke.
The conversations are primarily dismissive under the scenario. As noted by Yahoo Finance last week:
That isn’t accurate as the recession occurred only 6-months later. Furthermore, the bond market did know there was something very wrong economically as the Fed was engaged in a massive repurchase operation to bail out hedge funds.
As we noted then, all that was required to push the economy into a recession was an That event turned out to be a pandemic.
Notably, when psychology changes, for whatever reason, the rotation from to will find Treasury bonds as a Historically, such is always the case during crisis events in markets.
Effective Yields Accross Spectrum Events
Once again, it is pretty likely investors should not overlook the message from the bond market. Bonds are essential for their predictive qualities, so analysts pay enormous attention to U.S. government bonds, specifically to the difference in their interest rates.
This data has a high historical correlation to where the economy, stock, and bond markets generally head longer term. Such is because everything from volatile oil prices, trade tensions, political uncertainty, the dollar’s strength, credit risk, earnings strength, etc., reflects in the bond market and, ultimately, the yield curve.
Yield Curve Inversions
When it comes to yield curve inversions, the media always assumes this time is different because a recession didn’t occur immediately upon the inversion. There are two problems with this way of thinking.
As discussed in “BTFD Or STFR,” if you wait on the official announcement by the NBER to confirm a recession, it will be too late. To wit:
NBER Recession Dating Vs Market
Most of the yield spreads we monitor, shown below, have yet to invert. However, the best signals of a recessionary onset occur when a bulk of the yield spreads turn negative simultaneously. However, even then, it was several months before the economy slipped into recession.
Yield Spreads and Recessions
When numerous yield spreads turn negative, the media will discount the risk of a recession and suggest the yield curve is wrong this time. However, the bond market is already discounting weaker economic growth, earnings risk, elevated valuations, and a reversal of monetary support.
Historically, a recession followed when 50% or more of the tracked yield curves inverted. Every time.
Percent of Yield Curves Inverted
Ignore At Your Own Risk
In the World War II real-time strategy game , the engineer squad would sometimes say:
Since then, the statement has become a common meme on the internet to espouse the disappointment from various actions, from doing the laundry to getting a job.
Well, the latest suggested action, which will ultimately lead to investor disappointment, is:
In March 2019, Mark Kolanovic of J.P. Morgan stated:
MW-HG413
12-months later, the market was down 35%, and the economy was in the deepest recession since the
The yield curve is sending a message that investors should not ignore. Furthermore, it is a good bet that investors will likely act sooner than later. Of course, the contraction in liquidity causes the decline, which will eventually exacerbate the economic contraction.
Despite commentary to the contrary, the yield curve is a of what is happening in the economy currently, as opposed to economic data, which is and subject to massive revisions.
More importantly, while the consumer may be continuing to support growth currently, such can, and will, change dramatically when job losses begin to occur. Consumers are fickle beasts, and it will happen very rapidly when a change in psychology occurs.
While using the as a tool is unwise, it is just as foolish to dismiss the message it is currently sending entirely.
History has not been kind to those that do.
