The U.S. Treasury yield curve inverted yesterday, Monday. The 5-year yield declined to 2.833%, and the 3-year yield was 2.836%. Yes, this is a small inversion. However, it is important. The last time we had an inverted yield curve was in February of 2007. It has been over 11 years and 11 months for the inversion to return.
What does an inverted yield curve mean? Investors are expecting the following:
1. The Federal Reserve will stop inflation, so there is no need for a higher yield to compensate for time and inflation risk.
2. Investors are concerned that yields will be declining, and they believe it is prudent to buy longer-term assets, even at lower yields.
What have we learned from inverted yield curves?
1. A recession normally follows a yield curve inversion. It typically takes about 18 months from the first inversion to a recession.
2. It is an indication that we should start to extend the duration of our bond portfolios to capture a higher yield before yields decline.
The US bond market has lots of moving parts. This mild inversion may be related to supply and demand. If there are more buyers than sellers of 5-year bonds, the yield will go down. There is a large trade imbalance as a lot of US importers pre-bought a plethora of products in an attempt to beat the tariffs. The sellers end up with US dollars and need to do something with them. Did they buy 5-year US Treasuries?
Please note all major U.S. Markets (the NY Stock Exchange & Nasdaq) will be closed Wednesday, December 5th, for a national day of mourning in honor of former U.S. President George H.W. Bush.
Contact your advisor to discuss ways to invest in this volatile market. All of us at McQueen Financial are dedicated to your long-term success.
Have a great week.