Yield Curve Inversion

Dear Clients and Friends, 

You’ve likely been seeing and reading all the hype about the famous yield curve inversion. I found this to be an ideal time for my first Keeping it “Reel” post, so I’m writing this piece today to provide some clarity as well as my opinion on this topic. I had delayed the release of this because of Hurricane Dorian.  

While the media seems to be laser focused on this ‘yield curve inversion’, there are several key items at play here. Historically, the short end of the curve rising is the driving factor behind an inversion, often caused by Federal Reserve rate hikes. In this case, the long end coming down has been the force at play. I feel that a primary reason for this is the 17+ trillion (that’s not a typo) in sovereign debt that is yielding negatively…yes, believe it or not, people are lending money to get less back. This has likely caused an out sized demand for US debt securities as global investors seek positive low risk returns, thus bringing the long end of the curve down (buying bonds causes yields to fall).

While the media may be telling you that this calls for recession, it undoubtedly is different this time around from the 5 previous inversions. I am not saying that there will not be a recession forthcoming, but I am saying that this particular event may not be the tell tale signal that the media wants you to believe and react upon. While economic data does not suggest a recession imminent right now, it is showing slowing in several indicators. I continue to remain cautious at this time simply because of market valuation, global economic weakness, an escalated trade war, and how late we are in this cycle. My sentiment can certainly change if we experience any significant downward adjustment in market valuation as the risk of every new dollar invested becomes less over the long term. A trade deal with China should also help give our economy and markets another shot in the arm.

While there is no reason to panic or become overly fearful, I continue to monitor economic and market conditions on a daily basis in order to help clients make the best decisions as it relates to their particular goals. 

If you have any questions whatsoever or wish to discuss more, please don’t hesitate to reach out! Thanks for reading.

Mike Lambrechts

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