Yield Curve Inversion Talk is Wasteful Gossip

0 | By Shah Gilani

Talking about the yield curve is usually a turn-off for most investors.

That’s because the relationship between any two bills, notes, or bonds that make up the yield curve is wonky at best, and only interesting to bond traders who calculate things in basis points.

But, suddenly, everyone’s talking about the yield curve, the inversion of a part of the curve.

Here’s what the fuss is about, how listening to it is a waste of time, and what it means for stocks…

The Shape of a Yield Curve

A yield curve starts at zero on the left side of its axis (though for years, in many countries, government bond yield curves start in negative territory).

Those very low numbers are the interest rate paid on the shortest maturity “bills” available.

As the curve ascends (to the right) in a typically gentle “U” shape, its rise reflects higher interest paid on longer and longer maturity bills, notes, and bonds.

A bill is an instrument that has a maturity of less than a year. Notes have 1 to 10 years’ maturity. And bonds have maturities from 10 years to as much as 100 years.

Most of the time, analysts and the financial press refer to all of them, no matter the actual maturity, as just bonds.

That’s what a yield curve is.

How it’s “read” is important to bond traders, bankers, economists, and now, it seems, it’s important to everyone.

There are regularly watched and traded relationships between different yields on different maturity bonds. The relationship between two different maturities and their different yields is measured in basis points (a basis point is one 100th of 1%) and referred to as “spreads.”

When spreads are narrowing, it means yields on two different maturity bonds are getting closer.

An inversion is when the yield on a longer maturity bond becomes less than the yield on a shorter maturity bond.

What happened last Friday that’s got everyone’s tongue wagging is the U.S. Treasury 10-year bond yield ticked below the U.S. Treasury 3-month bill yield.

At 4:35 p.m. ET, the yield on the 3-month Treasury bill was 2.459%while the yield on the 10-year Treasury note was 2.437%, according to Refinitiv TradeWeb data.

That’s unusual, so unusual. The last time it happened was in September 2007, which was 4,227 days ago.

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Why Is the Inversion of The 3 Month-10 Year Curve Important?

Because, not only is that particular spread inversion the most accurate recession leading indicator, having correctly “predicted” the last six recessions with no false positives (inverting in 1989, in 2000 and in 2006, with recessions starting in 1990, 2001, and 2008) … It also feeds directly into Wall Street recession models: the more inverted it is, the higher the odds of a recession.

That’s what all the fuss is about.

It’s interesting to me because I’m an old bond trader. But I don’t live and die by bond spreads, or by inversions, or by their potential predictability of anything.

And you shouldn’t either.

If a recession’s coming, it’s coming and will get here when it gets here (a recession is technically two consecutive quarters of negative GDP growth).

Talking about it is wasteful because it’s negative, and negative thinking usually scares investors, especially equity investors.

It’s wasteful in financial terms, too.

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That’s because a recession may take two years to get here, if it even arrives, and in the process, meaning from the time everyone’s pointing to the yield curve inversion of 10-year and 3-month bond yields, the Fed, with everyone worried about a recession, isn’t going to raise rates.

They are, in fact, likely to lower rates.

That’s good for equities.

In the weeks, months, and quarters ahead, I’ll be pointing to how good it’ll be – based on yield curve spreads, of course.

Follow along; I’ll make it profitable for you.

In fact, my friend and colleague Keith Fitz-Gerald has written an entire book, completely outlining 61 moneymaking opportunities that could score you over $200,000. The best part? He’s giving away a bunch of FREE copies right now.

This deal won’t last forever though, so don’t drag your feet.

Because as crazy as things are going to get whenever this recession hits, you’re going to want to have as many possible moneymaking tricks up your sleeve as you can.

Click here to learn how you can grab your copy Keith’s book.



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