I have researched stocks for 27 years, starting fresh out of college at Lehman Brothers and then moving to Donaldson, Lufkin and Jenrette. The 3-month US Treasury already inverted versus the … risks and opportunities. China’s Bond Yields Throw Another Curve as Inversion Deteriorates Yield on 10-year bonds falls to 3.55%, well below the yield on one-year debt The Pudong financial district in Shanghai. Is … The U.S. Treasury yield curve inverted again, with 3-month Treasury bills holding a higher yield (1.56%) than 10-year Treasury notes (1.46%). If it costs a bank more to finance the money underlying a loan than the interest that bank can earn on the loan, the bank would take a loss on that loan. For stock market investors, an inverted yield curve is a sign that an economic recession could be on the way. I think most investors grab that basic fact. It offered a false signal just once in that time. At most times in economic history, a dollar two days from now has been worth more than tomorrow's dollar, which is worth more than today's dollar. For the past 10 years, naysayers have been calling for another global financial crisis and yet my stock portfolio has gone up, up, up...what is different now? Selling stocks into an economic downturn isn’t panic, it is just smart investing. There’s a narrative that we can apply to these movements, so we will tend to focus on it a lot more than is probably warranted by the pure numbers. So, the Chinese financial system has more than quadrupled in the past decade. The last time this part of the yield curve inverted was in December 2005 — two years ahead of the financial crisis and recession. Back in 2017, China’s yield curve inverted -- a move that in a U.S. context would be taken by some as anticipating a downturn. Second, the inverted yield curve results from global economic weakness. The Sevens Report is the daily market cheat sheet our subscribers use to keep up on markets, seize … I can be reached at jim@excap.biz, © 2021 Forbes Media LLC. A trader works on the floor of the New York Stock Exchange (NYSE) in New York, U.S., on Monday, Feb. ... [+] 8, 2016. Jamie Dimon’s balance sheet at JPMorgan is much more important than the one based on your household's financial situation. Normal Convexity in Long-Term vs Short-Term Maturities. The last seven recessions the country has seen were preceded by an inverted yield curve — and many experts agree that another inversion of the yield curve could be on its way. With the world pre-occupied on the U.S. yield curve – which is flat and already heavily inverted – many are overlooking problems from the world’s third … I agree Scott. Today, gold is rising and EM is rising. Market Extra Inverted U.S. yield curve points to renewed worries about global economic health Published: Feb. 1, 2020 at 9:16 a.m. The latest inverted yield curves have counterbalanced hopes that 2020 would bring an increase in economic growth and inflation, following the signing of the phase one China-US trade deal. The valuation of stocks, above all else, depends on estimates for rates of earnings growth. So what does the recent inversion of the yield curve in China say about the country’s economic outlook? President Trump is distressed about the “CRAZY INVERTED YIELD CURVE,” and he doesn ... particularly related to China. Expert insights, analysis and smart data help you cut through the noise to spot trends, The yield curve is a plot of interest rates for government bonds of all maturities in a given country. Investors closely monitor the gap separating ten-year and three-month yields. Why? So here are a few answers to basic questions: What is an inverted yield curve? As of June 30, 2018, the latest data available, Chinese financial system assets totaled $39.0 trillion dwarfing the U.S.’ total of $17.5 trillion. When shorter-term rates are higher than longer-term bond yields, that is known as an inverted yield curve. An inverted yield curve is when the yields on bonds with a shorter duration are higher than the yields on bonds that have a longer duration. U.S. stocks tumbled, with the Standard & Poor's 500 Index falling to a 22-month low, as a second straight selloff pushed bank shares to the lowest since 2013 and left the Nasdaq Composite Index approaching a bear market. Simply put, it's not a bad thing for consumers. Bond yields represent, in percentage terms, the price investors are willing to pay for those securities. There seems to be a basic misunderstanding of the meaning of the inverted yield curve and its meaning for equity markets. The Federal Reserve and other central banks have consistently referred to the fear of deflationary pressures as the biggest worry facing financial markets. If you drew a line between them on a graph, it would be an upward sloping curve… O ne widely followed and conventional measure of the US yield curve inverted last week for the first time since 2007 with the 10-year US Treasury yield falling below the yield on the 2-year maturity. If I am lending you a dollar for five years not five days, I want an extra incentive to do that. This attracted widespread focus across the investment community and media. The curve between 2-year and 10-year notes, which is also watched as a recession indicator, inverted for the first time since 2007 in August. Canary Wharf: does the east London office district have a future? ET Isn't lower inflation a good thing? But the bond market looks like the world is in the middle of a global catastrophe. There are two common explanations for upward sloping yield curves. The yield Walmart, Cisco, Macy's, GE were big movers. Why did yield curve inversion fail as recession predictor in 2019? Inverted US yield curves and recessions An inverted yield curve for US Treasury bonds is among the most consistent recession indicators. An inverted yield-curve occurs when long-term debts have a lower yield as compared with short-term debt. That’s also why the yield curve in the U.S. has inverted. Obviously bankers are not stupid, and loan growth can be expected to decline when short-term funding costs are higher than long-term loan prices. I am making a few bucks on this confusion, to be sure, but I would rather see an educated investing public. Some have pointed to the escalating China … Any measure of U.S. current economic activity or financial system liquidity looks fine or even better than fine. As of March 27th, 2019, the 3-month to 10-year spread is -5 basis points (-0.05%). The rate of inflation in the U.S. probably won't change much in three months. If it costs me less to buy things outright and lower interest rates also result in lower costs to finance purchases made over time (house, car, etc.) Since President Trump tweeted about imposing new tariffs on China, global equity markets have gone into a tailspin. Inflation expectations for future periods are lower and that can only mean a slowing, and perhaps contracting, global economy. Photographer: Michael Nagle/Bloomberg, EY & Citi On The Importance Of Resilience And Innovation, Impact 50: Investors Seeking Profit — And Pushing For Change, Booking Holdings Stock Looks Fully Priced. Central Bank Rate is … In general, longer-dated bonds carry higher yields, in part because a longer investment timeline multiplies the probability of default or other risk events. Longer-term bonds typically offer higher returns, or yields, to … Two Men Carrying Zip Ties At Capitol Riot Arrested After Citizen Sleuths ID’d Them Online, China Quits Recycling U.S. Trash As Sustainable Start-Up Makes Strides, Ted Cruz Faces Fierce Backlash: 71% Of Americans Don’t Trust Him To Protect Democracy, Blunt: Impeachment May Be ‘Long-Term Punishment’ For Trump, But There’s ‘No Possibility’ It Will Happen Before He Leaves Office, Lawmakers Sheltering During Capitol Riot May Have Been Exposed To Coronavirus, Stock Market: Tesla’s Uptrend Faces Serious Hazards. Since 2005, the yield on the 10-year Chinese government bond (CGB) has exceeded the one-year CGB yield by an average of 100 basis points (bps). An inverted yield curve reflects a scenario in which short-term debt instruments have higher yields than long-term instruments of the same credit risk profile. SAN FRANCISCO/NEW YORK (Reuters) - A closely watched section of the U.S. yield curve inverted on Wednesday for the first time in over 12 years, rattling investors already worried that a U.S.-China trade war might trigger a global recession and kill off a decade-long bull market on Wall Street. Normal Convexity in Long-Term vs Short-Term Maturities. Treasury yields mostly fell across the curve after rising earlier during the session, and a key slice of the yield curve remained inverted. The yield curve has inverted and you should sell your stocks. An "inverted yield curve" may sound like the kind of obscure financial terminology that needn't worry anyone outside the doors of big banks but it … I was also just looking at 1998. An inverted curve slopes down A simple way to get an idea of the slope of the yield curve is to compare a short-duration government interest rate for a two- or three-year government bond with the rate on a ten-year government bond. Does that worry you? A dollar today should always be worth more than a dollar tomorrow. Opinions expressed by Forbes Contributors are their own. Yield curve inversion is a classic signal of a looming recession. 10 Years vs 2 Years bond spread is 46.3 bp. U.S. stocks tumbled, with the Standard & Poor's 500 Index falling to a 22-month low, as a second straight selloff pushed bank shares to the lowest since 2013 and left the Nasdaq Composite Index approaching a bear market. Each of those three factors certainly qualifies. The yield curve has inverted and you should sell your stocks. I invest solely for individuals, and for them I try to dispel the darkness that emanates from Wall Street. Industrial production had its lowest reading in 17 years, while retail sales and fixed investment lagged estimates. Although the yield curve of between 1-month and 10-year Treasury rates is inverted, it is only a third of the full yield curve. Note: The inverted yield curve wasn’t the cause of the recession but rather a symptom of it. The global economy in 2019 is based on access to credit, and it has been for the past 50 years. China reported a triple-miss on some key data overnight. The dreaded inverted yield-curve has arrived. The stock market fell in volatile fashion amid China trade news and the first inverted yield curve since 2007. The U.S. Treasury yield curve inverted again, with 3-month Treasury bills holding a higher yield (1.56%) than 10-year Treasury notes (1.46%). At DLJ I was a Senior Analyst, I have researched stocks for 27 years, starting fresh out of college at Lehman Brothers and then moving to Donaldson, Lufkin and Jenrette. The U.S. curve has inverted before each recession in the past 50 years. As of this writing, the yield curve has been inverted for nearly two months, signaling that a recession may be on the horizon. March 2019 at 12:37. It has been positive since early September. That’s why the Chinese government's decision to let the yuan/dollar exchange rate rise above 7:1 (making Chinese financial assets worth less in dollar terms) is so scary. It's the deepest the yield curve has been inverted since Oct. 9. History shows that when the yield curve inverts, a recession may soon follow. 12 Responses to “The yield curve inverted” Kgaard 22. Similarly, a dollar a year from now is worth more than that two-day dollar and the dollar five years from now is worth more than the dollar one year from now, and on and on and on. The Fed swept this type of curve “under the rug” last year in favor of a version that examines shorter-term treasuries. Other yield curve measures have already inverted, including the widely-watched 3-month/10-year spread used by the Federal Reserve to gauge recession probabilities. China’s regulatory efforts to curb lending in the financial markets are causing traders to dump short-term bonds, creating a rare inversion in the Chinese Treasury Bond yield curve. In December 2008 the total assets of the Chinese financial system were $9.1 trillion. Usually, there is a partial inversion, as shown below. That includes many of the talking heads on CNBC, by the way. On the morning of August 14, the yield curve between 2-year and 10-year treasuries inverted.. Yield curve inversion is a classic signal of a looming recession. Today’s disappointments follow a 27-year low on gross domestic product in mid-July. You can’t just sit in Rexmont, Pennsylvania and say that the fact that assets in China’s financial system now represent more than half of the world’s GDP doesn’t concern you. Back in 2017, China’s yield curve inverted -- a move that in a U.S. context would be taken by some as anticipating a downturn. Anything that makes Chinese companies less likely to repay their loans is a decided negative for global bond markets. That is a simple, declarative statement, and yet one that I have not read anywhere this morning. So, wake up, smell the coffee and lessen your holdings of equities. ... so the yield curve is inverted. 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'This time around, equity investors have been panicked by an inverted yield curve which in basic terms means that it's now cheaper for the government to … I had a decade of sell-side experience, attaining the CFA designation. The Final Post in our Economic Series In the final part of our series we are going to be covering a topic we get asked questions most often on and is probably most relevant to our investors – the state of the U.S. housing market. After years of growing my own portfolio, I founded Portfolio Guru LLC three years ago. The US Treasury yield curve inverted on several occasions last year for the first time since the global financial crisis as trade tensions between the US and China frayed. That compared to $12.2 trillion in U.S. financial system assets. By Noel Randewich and Saqib Iqbal Ahmed. Then we can say it is an inverted yield curve. On Thursday, the benchmark yield on five-year Chinese government bonds rose above the 10-year yield, the first such inversion since data from the National Interbank Funding Center began in 2010. It's a key data point for investors who fear it means trouble ahead for the economy — and a possible end to this historic rally in the stock market. Today, gold is rising and EM is rising. Central Bank Rate is 0.86% (last modification in June 2020).. A look at the most recent previous inverted yield curve, which manifested in 2006, reveals that it was a precursor to the 2008 financial crisis. And in the past 50 years, every recession in the US followed such inversion, while only once the inverted yield curve was not followed by a recession. After all, the yield curve inverted roughly 14 months before each of the past nine U.S. recessions. The Sevens Report is the daily market cheat sheet our subscribers use to keep up on markets, seize opportunities, avoid risks and get more assets. There's a second derivative there, however. This, too, happened last week when the 10-year Treasury yield fell below the 2-year Treasury yield. Oddly enough, even the shorter-term version that the Fed still favors has been inverted for a longer period of time. In the bond market, an inverted yield curve has often predicted recession in developed economies. When demand for bond purchases rises, prices rise, and thus yields (interest rates) fall. The Hong Kong 10Y Government Bond has a 0.778% yield.. 10 Years vs 2 Years bond spread is 69.8 bp. A yield inversion typically portends a recession. Full Yield Curve Saucer Shaped, not Inverted. That’s why President Trump’s trade tweets can and will move the markets significantly—in either direction. These are basic facts, not conspiracy theories or political slogans. I am sorry if that offends you from a political standpoint, but please do not misunderstand. 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