[ad_1]
As a Dow Jones Industrial Average
DJIA, + 2.06%
, S & P 500
SPX, + 2.14%
and Nasdaq Composite
COMP + 2.65%
lost between 6.6% and 7.9% in the worst month of May for equities since 2010, bond prices have skyrocketed.
Bond yields, which move in the opposite direction of price, fell below the 2.1% mark on the 10-year Treasury bond.
TMUBMUSD10Y, -2.03%
Tuesday, from 3.23% last November, a gigantic movement of bonds in such a short time.
At the same time, short-term rates have remained stable, creating the dreaded prospect of a reversed yield curve, when long-term yields are lower than short-term returns. This was an excellent predictor of economic recession, and a yield curve expert said the current trend reversal was blinking yellow, or even red, for markets and the economy.
Campbell Harvey, a professor at Duke University's Fuqua School of Business, has been following the reversals of the yield curve for over 30 years. He showed the reliability of the indicator in his doctoral dissertation at the University of Chicago in 1986.
This thesis (reviewed by a select committee of future Nobel laureates Eugene Fama, Merton Miller and Lars Hansen) showed that an inverted yield curve would have anticipated the previous four recessions. After its publication, the model predicts the next three recessions – 1990-91, 2001 and 2007-09 – giving it a perfect record, going back about 40 years.
Economists and traders follow several different yield curves, but Harvey prefers the gap between the three-month Treasury bill and the five- or ten-year Treasury bill. The graph below, reprinted with his permission, shows that there is little difference between these two yield curves over time.
Harvey's graph shows that the probabilities of a yield curve recession reach 80% to 100% in the 1970s and 1980s, and then fall in the range of 40% to 50% for the last three recessions. As of June 3, the yield curve implied a recession probability of about 40% – clearly in the danger zone.
Harvey considers this indicator as definitive only if an inverted yield curve lasts an entire quarter. He will know for sure by June 30, but my own analysis of the data shows that the gap between the US Treasury at three and five years – but not the three and ten years – turned out to have been reversed. most of this quarter, which means problems ahead.
"Unconditionally, it means that a slower growth is announcing it. Empirical experience suggests that if you have a full quarter of inversion, this is followed by a recession, "explained Harvey from London during a phone interview Monday. "It's a bit disturbing because it seems we have that momentum that … it was reasonably flat, and then we become more and more negative. The dynamic suggests that this signal will soon flash red. "
The latest Global Business Outlook study from Duke University / CFO, reveals that 67% of CFOs surveyed believe that the US will be in recession by the fourth quarter of 2020, while 84% think that it will not be the same. a recession will be in progress. by the first quarter of 2021. This is roughly the 12 to 18 month delay in a negative yield curve forecasting the recession, Harvey said.
Harvey emphasized that a negative yield curve does not cause a recession, but it also has a considerable impact on the audience's feelings. "People see that, it's a red flag and they change their behavior," he explained. "So, consumers, perhaps, we will not be using the credit card and taking this vacation to Orlando this year. And for businesses, we are now thinking of building this new facility, why not wait a bit? "
But it's more than just a negative feedback loop or a self-fulfilling prophecy. "You should think of this as people who are doing the right thing in terms of risk management," Harvey said.
Greater caution, he added, "actually increases the risk that, in the event of a slowdown, it will be much milder. I much prefer softness [recession]. I want to develop the landing smoothly. One way to do this is for consumers and businesses to be cautious about these alarms. "
Harvey is an academic and does not give investment advice. But, pushing his observations to their logical conclusion, I think the moment is well chosen to be cautious in your investment profile. If your equity allocation is higher than your target, I would benefit from any market rallies like the one we had on Tuesday after Federal Reserve Chairman Jerome Powell said he was open to a rate cut. (Long-term rates also went up a bit, but the yield curve remained clearly negative.)
I would also put more money in bonds, including medium-term treasury funds and ETFs, such as the Vanguard Intermediate Term Term ETF.
VGIT, -0.21%
which are the cheapest, the easiest and the best against the stock market risk. In this way, you can turn a negative yield curve from your enemy into your friend.
Howard R. Gold is a columnist for MarketWatch. Follow him on Twitter @howardrgold. It does not have any of the titles mentioned in this column.
Lily: The reversal of the bond market resembles that of 1998, which means "maximum risk for the stock market"
More: An inverted yield curve is usually scary. Not this time
[ad_2]
Source link