Many are speculating about a potential recession because of an inverted yield curve. NO ONE KNOWS FOR SURE. Economic activity is strong, balance sheets are still in good shape. While every recession was foretold by an inverted yield curve, not every inversion has resulted in a recession. Example: Tornadoes.
- You can’t get tornadoes without wind and rotation. But that doesn’t mean every time we have wind and rotation; we get a tornado.
What does that mean for us?
I think it is possible longer-term bond yields are dropping due to their bargain relative to foreign bonds. Many countries offer their 10-year bonds at a negative interest rate. That’s right – I meant a negative rate of return. Why would I buy a 10-year German Bond at a yield of -0.70% (that’s a negative), when I could buy the safest and most liquid asset in the word, a 10-year US Treasury yielding 1.55%? That is a difference of 2.25%.
Perhaps we are seeing Treasury bond yields decline because there is significant global demand for them. Maybe it has nothing to do with an expectation of a slowing economy. Maybe not.
We just don’t know! But to jump to the conclusion that an inverted yield curve means a recession is imminent (and we better get to cash) is irresponsible. As with all investment decisions, we should consult our plan and deliberately consider the information available. We cannot assume that what the media is spewing is real and true. Oftentimes, the best decision in the heat of the moment is to turn off the TV and go do something you enjoy.