Inverted Yield Curve looks to be forming ... ... what should we do?

KYHBKO
2022-03-30

There is much talk about yield curve inversions and their correlation with recessions.

the news painted a mixed response to the inverted yield curve

 

Yield curve extracted from Reuters

From Investopedia:

An inverted yield curve describes the unusual drop of yields on longer-term debt below yields on the short-term debt of the same credit quality.  
Sometimes referred to as a negative yield curve, the inverted curve has proven in the past to be a relatively reliable lead indicator of a recession.

The yield curve can be expressed using a percentage of the 2-year and 10-year treasury yield rates or the net difference between the 2 year and 10 years treasure rates.

From marketwatch.com - note that a recession usually follows the inversion

An inversion in these particular points has correctly predicted a recession with a lead time of between eight months and two years in each of the last eight recessions. The average time between the formation of the inverted yield curve and the subsequent recession averages out to be16.2 months (between 1980 & 2019)

Banks traditionally make their money by borrowing short term (through deposits) at low rates, lending longer-term at higher rates. The banks would profit from the difference. But when the yield is inverted, the bank treats this as an alarm.

it’s taken as the bond market saying that this can go no further, and makes it hard for the Fed or any other central bank to proceed with a tightening.

While the news share conflicting views about how we should treat the inverted yield curve, let us "assume" that the worse is coming but remain hopeful that the market will recover eventually. Between greed and fear, understanding businesses & their fundamentals keep us as realists who take advantage of the price gaps found between despair & excitement.

For long term investing, this will be treated as part of the volatility of the general market where recessions are the best time to pick up great stocks at good discounts. Always set aside cash for "such" rainy days. But for now, life goes on. It could be months before something or if anything happens.

Time in the market is our greatest advantage

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Comments

  • chaicka
    2022-03-30
    chaicka
    2022 War Chests been building as shared previously. Hopeful the ‘golden opportunity’ does not come too early, before chests become sizable. Late Q3 would be nice. [Cool][Grin]
  • chaicka
    2022-03-30
    chaicka
    I love the statement “Always set aside cash” and be ready for the periodic ‘golden investment opportunity’. Hope with better knowledge now, we can benefit from this Triple-Tiger year of wealth. Huat!
    • KYHBKO: 

      it is not easy as there are some attractive stocks, it will go down to assets allocation. all the best to all of us.Huat ah!

  • EvanHolt
    2022-03-30
    EvanHolt
    Do you think the Fed has the ability to prevent recessions?
    • KYHBKOReplyEvanHolt: 

      key is to get great companies who can do well in such environments.  Happy investing.

    • EvanHoltReplychaicka: 
      Maybe you're right, there are indeed many external factors that influence the Fed's decisions.
    • EvanHoltReplyKYHBKO: 
      Indeed, the Fed has too many factors to consider.
    • KYHBKO: 

      there is a limit to what the Fed can do.  the market will need to respond appropriately too. Fed has limited control towards food, fuel and supply chain crisis.

    • chaicka: 
      Global Markets, Supply Chains, etc is not something a single organisation or country can dictate.
  • DonnaMay
    2022-03-30
    DonnaMay
    Don't worry too much, many good companies are already undervalued.
    • KYHBKOReplyDonnaMay: 

      thanks for your sharing

    • KYHBKO: 

      any good recommendations of such undervalued companies?

    • DonnaMayReplyKYHBKO: 
      Bank stocks are my strong recommendation.
  • Wealthliner
    2022-03-30
    Wealthliner
    thanks for sharing
  • BurnellStella
    2022-03-30
    BurnellStella
    An inverted yield curve is indeed a red flag.
    • KYHBKO: 

      let us watch closely.

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