Many are concerned that the inversion of the yield curve is a scary low-cyclical warning, but in fact, it may be even fresher as the curve turns and begins to weaken again.
It was also when investors could see a recession come ahead and sell stocks.
The so-called reverse curve, in this case, means that investors are seeking a higher return in the shorter term, 2-year state tax, than they are on a 10-year note. The 10-year return, which is moving at the opposite price, fell below the 2-year return for the first time since 2007. Wednesday.
To steep, on the other hand, would be a reversal of that move, where the 10-year-old regains higher returns.
The reverse curve does not always mean that a recession is coming, but it often does. Since the late 1
Another common market fear is that the Fed will respond, but not soon enough or aggressively enough to stop the recession.
"One should be more concerned when there is a rapid gain, as it is a better signal of an imminent decline, and then risk management strategies make more sense," notes Tobias Levkovich, head of US equity strategists at Citigroup. "It appears that financial redundancies appear when the Fed seems to be reacting aggressively to counter GDP weakness, but may be too late, except to dampen the scale of the decline in business activity."
Stocks usually continue to move higher for several months after the inversion, but when the steep beginning began, investors could become nervous and dump stocks.
When the curve slopes down again, it means that the front of the curve – or 2-year returns in this case – would be under pressure as the Fed cut interest rates. The 2-year mirror reflects the Fed's target interest rate level and will move lower as the Fed eases, or reduces interest rates. The 10-year moment reflects a flight-to-safety and economy concerns.
"If you look at the recent recession, the faithfulness of the inverse of the yield curve before the recession starts," said Jon Hill, ranking strategist at BMO. "Then the curve begins to weaken and we fall into recession. What really happens is when the curve goes down, the market price is a recession with very strong conviction. It's the moment when a recession starts to seem quite likely that the front ends stretch like crazy and the curve steep. "
That means 2-year returns would see downward pressure as investors buy collateral and the Fed moves. This may result in less than 10-year returns, and the curve will weaken as trade continues. The yield curve was no longer reversed Thursday, but it could remain so. 2-year-olds gave 1.55% and 10-year-olds were 1.57%.
"Recessions tend to happen on average 12-15 months after the state curve inverses, but it can also extend over two years. Thus, only making a single investment decision can be swift and inaccurate," Levkovich notes.
Levkovich said stocks should be helped first by the attraction of higher dividend yields, over falling bond yields.
He notes that he continues to expect the S&P 500 to be at 2,850 by the end of 2019, and he also expected significant volatility. The S&P 50 closed at 2,840 on Wednesday, down 85 points.
"We also think the knocking or energy, although understandable, looks exaggerated. We further argue that the health care system can be a safe haven from hiding in dollars, gold or US treasuries," he wrote in a note . He added that he had increased food and started retailing to overweight last month.
Levkovich said he is uncertain whether the way to play the market right now is through higher dividend yields, since REITS could see a decline in underlying property values in an economic downturn.
"However, we understand a preference for tools, as business is undoubtedly more stable," he said.