The Inverted Yield Curve (again) : How, what it means, and what do we do?

May 30, 2019 | Jeremy Goldfarb


The talk over the past week has been largely centered around the sharp drop in the US 10 year treasury rate, and how it is now (once again) inverted to the point where the 3 month T-Bill is 12 basis points higher than the 10 year. This is the lowest level since September 2017. The inversion may actually be worse if you account for the fed balance sheet tightening, but that is something for another day.


How did we get here?

Well....quickly for one thing. Besides that though, the in the summer of 2018, the market was pricing in 1 rate hike, and we have since moved to pricing in 3 cuts! Another factor is inflation. The prospect for any inflation has dropped precipitously which has make the bond markets nervous. No inflation usually means sliding growth.


What does it mean

In short, no bueno. Inverted yield curve means banks don't lend. If banks don't lend, credit growth dries up, business and household spending dry up too, and growth follows closely behind. The knock on consequences of the inverted curve are all based on how financiers navigate the lending landscape in this case. Bank revenues are driven largely by P&C (personal and commercial) business which is lending and deposit centric.


What do we do?

Not surprisingly in this want to cover all of your bases. The outcomes could be very different, so you want to be prepared. If you believe that there will be cuts to rates, you would be happy buying bonds at current prices, but if you are wrong....the consequences could see significant bond repricing and your values will be affected.



Things are not absolutely clear yet, so stand by. GICs on a relative basis are somewhat attractive, so maybe there is room again for those (we bought fairly heaving back in the fall with higher rates on the short end). We are going to keep an eye on both the corporate bond market, and the job market. Recession may be around the corner, but these numbers will help dictate just how far.