<story><title>Yield Curves Invert in U.S., U.K</title><url>https://www.bloomberg.com/news/articles/2019-08-14/u-k-yield-curve-inverts-for-first-time-since-financial-crisis</url></story><parent_chain><item><author>apo</author><text>Key recession indicator is flashing red. Unlike the stock market, which is both backward- and forward-looking, the bond market is myopically forward-looking.&lt;p&gt;When the yield between the 10-year and 2-year US treasury inverts, a recession is months away.&lt;p&gt;This chart, showing the difference between the yield (or spread), shows recessions in grey:&lt;p&gt;&lt;a href=&quot;https:&amp;#x2F;&amp;#x2F;journal.firsttuesday.us&amp;#x2F;using-the-yield-spread-to-forecast-recessions-and-recoveries&amp;#x2F;2933&amp;#x2F;&quot; rel=&quot;nofollow&quot;&gt;https:&amp;#x2F;&amp;#x2F;journal.firsttuesday.us&amp;#x2F;using-the-yield-spread-to-fo...&lt;/a&gt;&lt;p&gt;Notice how even getting close to zero spread can sometimes be followed by a recession. But a negative spread always does.&lt;p&gt;Point to consider is the effect of Quantitative Easing (QE). Here, the Fed buys long-term treasuries such as 10-years. This makes long-term rates appear lower than they would otherwise be.&lt;p&gt;The Fed only slightly unwound this policy, meaning it still holds most of the long-term bonds it bought to fix the 2008&amp;#x2F;2009 crisis.&lt;p&gt;The net effect is that the Fed could be triggering an early recession warning here.&lt;p&gt;Regardless, combining this leading indicator with others such as transportation weakness, manufacturing slowdowns, and other economies tipping into recession (despite the loosest central bank policies in modern memory) leads to only one conclusion.&lt;p&gt;Prepare for the inevitable recession. It&amp;#x27;s not different this time.&lt;p&gt;Edit: one way to play this as an investor is to buy long-term treasuries. The idea being that as interest rates fall, the value of these assets increases (bond prices move inversely with interest rates). Go as long out on the yield curve as you can. Then when the Fed inevitably rides to the rescue, begin to unwind and capture the capital gains. Or not. Instead, just continue to receive above-market rate interest payments. There&amp;#x27;s risk here because there&amp;#x27;s no way to know how low long-term rates will fall before reversing course (and eroding any capital gains you might have picked up).</text></item></parent_chain><comment><author>cletus</author><text>I&amp;#x27;d just like to point out that the yield curve inverted in 2018 [1] yet here we are.&lt;p&gt;&amp;gt; Prepare for the inevitable recession. It&amp;#x27;s not different this time.&lt;p&gt;This point is tautological. Of course there will eventually be a recession. No one can say when.&lt;p&gt;There are different factors in every cycle. The QE period is essentially unprecedented. The rise of tech stocks in the last 20 years is a once-in-a-century type structural change in the economy.&lt;p&gt;It&amp;#x27;s fair to say the market is currently closer to the top than the bottom and above the historical mean and a reversion to mean is inevitable but whether the current mode goes on for days, months or even years is anyone&amp;#x27;s guess.&lt;p&gt;[1] &lt;a href=&quot;https:&amp;#x2F;&amp;#x2F;www.bloomberg.com&amp;#x2F;opinion&amp;#x2F;articles&amp;#x2F;2018-12-03&amp;#x2F;u-s-yield-curve-just-inverted-that-s-huge&quot; rel=&quot;nofollow&quot;&gt;https:&amp;#x2F;&amp;#x2F;www.bloomberg.com&amp;#x2F;opinion&amp;#x2F;articles&amp;#x2F;2018-12-03&amp;#x2F;u-s-yi...&lt;/a&gt;</text></comment>
<story><title>Yield Curves Invert in U.S., U.K</title><url>https://www.bloomberg.com/news/articles/2019-08-14/u-k-yield-curve-inverts-for-first-time-since-financial-crisis</url></story><parent_chain><item><author>apo</author><text>Key recession indicator is flashing red. Unlike the stock market, which is both backward- and forward-looking, the bond market is myopically forward-looking.&lt;p&gt;When the yield between the 10-year and 2-year US treasury inverts, a recession is months away.&lt;p&gt;This chart, showing the difference between the yield (or spread), shows recessions in grey:&lt;p&gt;&lt;a href=&quot;https:&amp;#x2F;&amp;#x2F;journal.firsttuesday.us&amp;#x2F;using-the-yield-spread-to-forecast-recessions-and-recoveries&amp;#x2F;2933&amp;#x2F;&quot; rel=&quot;nofollow&quot;&gt;https:&amp;#x2F;&amp;#x2F;journal.firsttuesday.us&amp;#x2F;using-the-yield-spread-to-fo...&lt;/a&gt;&lt;p&gt;Notice how even getting close to zero spread can sometimes be followed by a recession. But a negative spread always does.&lt;p&gt;Point to consider is the effect of Quantitative Easing (QE). Here, the Fed buys long-term treasuries such as 10-years. This makes long-term rates appear lower than they would otherwise be.&lt;p&gt;The Fed only slightly unwound this policy, meaning it still holds most of the long-term bonds it bought to fix the 2008&amp;#x2F;2009 crisis.&lt;p&gt;The net effect is that the Fed could be triggering an early recession warning here.&lt;p&gt;Regardless, combining this leading indicator with others such as transportation weakness, manufacturing slowdowns, and other economies tipping into recession (despite the loosest central bank policies in modern memory) leads to only one conclusion.&lt;p&gt;Prepare for the inevitable recession. It&amp;#x27;s not different this time.&lt;p&gt;Edit: one way to play this as an investor is to buy long-term treasuries. The idea being that as interest rates fall, the value of these assets increases (bond prices move inversely with interest rates). Go as long out on the yield curve as you can. Then when the Fed inevitably rides to the rescue, begin to unwind and capture the capital gains. Or not. Instead, just continue to receive above-market rate interest payments. There&amp;#x27;s risk here because there&amp;#x27;s no way to know how low long-term rates will fall before reversing course (and eroding any capital gains you might have picked up).</text></item></parent_chain><comment><author>nguoi</author><text>You don&amp;#x27;t have a time machine. Economic indicators work every time - until they don&amp;#x27;t.&lt;p&gt;&amp;gt;Notice how even getting close to zero spread can sometimes be followed by a recession. But a negative spread always does.&lt;p&gt;Everything since the last recession is, on some timescale, followed by a recession. So, technically, you&amp;#x27;ll be correct. But so were the people saying this in each of the years since 2008. If you don&amp;#x27;t have an upper bound on this, it&amp;#x27;s unfalsifiable and, when taken as advice, can&amp;#x27;t be used for any concrete actions.&lt;p&gt;If investors were as certain as you, a recession would be happening now.</text></comment>