With so many talking heads in the financial media discussing the fact that the ten-year US Treasury bond interest rate is now below the three-month Treasury rate, we thought we would give some context.
An inverted yield curve happens when shorter-duration Treasuries provide a higher yield than longer-dated maturities. With ten-year Treasuries currently yielding just under 2.1% and three-month Treasuries yielding 2.3%, we have an inverted yield curve. Does this tell us anything?
Paul Samuelson, a Nobel Prize-winning economist, once joked that the stock market has predicted nine of the past five recessions. The bond market, on the other hand, has been a reliable predictor. Over the past 50 years, a yield curve inversion lasting more than a month has preceded every one of the seven recessions. The time from when the yield curve inverts to the start of the recession has been anywhere from five to seventeen months.
There is debate among experts on how quantitative easing has affected current interest rates, with some analysts questioning whether rate inversion remains a reliable guide to a coming recession.
Over the past fifty years, recessions have lasted anywhere from six to eighteen months. Even with a previously reliable indicator suggesting a coming recession, the problem for the investor remains the unknowable beginning and end of any downturn. Those who sold during the market drop in December 2018 are now having to decide when to get back in. That is the fundamental problem with market timing – one has to be “right” twice – when getting out, and when getting back in.
If you’re a long-term investor and you systematically rebalance your portfolio, the bonds and cash in your portfolio will act as a buffer for your overall return in a down market. If you’re taking distributions, the same bonds and cash will ensure that you don’t need to sell stocks in a down market to generate your desired income.
Questions about the financial markets, your portfolio, or how a recession might impact your financial plan? Feel free to call or email us at any time. We’d love to help.
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