Game of Trades: This is Getting Worse than the 1929 and 2008 Yield Curve Inversions
One heavily-watched economic indicator is the difference between the 2-year U.S. Treasury and the 10-year. Typically, the 10-year offers a higher yield, as investors have to lock up their money for five times longer.
However, for nearly two years, the yield curve has been inverted. That means investors have gotten higher yields on shorter-term bonds. That typically reflects an environment that leads into a recession.
The real pain tends to come after the yield curve un-inverts. Historically, 6-12 months after an un-inversion, there has been a recession.
Yes, this time may buck that trend due to the circumstances of the pandemic and its aftermath. But until proven otherwise, investors should be cautious going forward. Especially since this latest inversion period is one of the longest and steepest on record.
During August’s selloff, the yield curve briefly un-inverted. It’s likely to un-invert again and stay that way after the Federal Reserve starts cutting interest rates later this month.
However, given the lag time in economic data, a recession will likely be declared well after a market crash. Avoiding such a crash can help avoid years of recovery time for your investments.
With yields starting to trend lower, investors may want to lock in relatively high bond yields now. And assets like gold, which have historically held up well during uncertainty, continue to shine.