This week, we actually had a yield curve inversion that potentially matters – the 2-year treasury actually briefly yielded more than the 10-year treasury. But why would anyone demand less return for lending for 10 years than for 2 years? Pretty perverse. More perverse than $16 trillion of negatively yielding bonds around the world? Suffice it to say that things in the bond market are far from “normal” at the moment. Why do we care? For a few reasons. First, it’s been said than a 2-10 inversion has resulted in a recession 100% of the time. But, it’s not so much that an inverted yield curve causes a recession, but rather an inverted yield curve is typically a symptom of financial conditions that give rise to a recession – often mentioned are tight credit conditions resulting from tighter than necessary Fed policy. Yet, despite this, an inversion can become a self-fulfilling prophecy if it substantially undermines consumer and business confidence. And that goes to the length of time that the curve remains inverted – we’re told that a few months of continuous inversion is necessary to confirm the recession signal.
Perhaps even more notable, in our opinion, was the move of the 30-year treasury to an all-time high and, by definition, the lowest yield ever, roughly 2.03%.
Some would argue that this time is different – always a dangerous statement in my opinion. They claim that the reason that the curve has flattened and even inverted is a result of the long-end moving more dramatically (see all-time high comment above) and this move is driven by a flight to safety ensuing from short-term fears about the economy, lower expectations for long-term growth and negative yields around the world.
Based on the historical research, we would agree that it takes more than a brief intra-day inversion to signal a recession. Further, it certainly is hard to argue that financial conditions are “tight” – all economic indicators that measure liquidity are at or near all-time highs. And, in our opinion, the Fed seems prepared to do more to lower rates in the short-term – at least they seem open to that. So, at least for now, a major piece of the rationale for an inversion signaling a recession seems to be notably absent.
The views presented herein are those of Validus Growth Investors, LLC (“Validus”) as of August 2019 and are provided for informational purposes only. There is no guarantee that any historical trend illustrated above will be repeated in the future, and there is no way to predict precisely when such a trend might begin. The information is based on the economic and market conditions as of this date. The information is not intended as a discussion of the merits of a particular offering and should not assume that any discussion or information provided herein serves as the receipt of, or as a substitute for personalized investment advice from Validus or any other investment professional.
This material is provided for informational purposes only and does not constitute a solicitation. The material is not intended to be relied upon as a forecast, research or investment advice and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. There is no guarantee that any forecasts made will come to pass. Past recession indicators do not necessarily indicate future indicators
