Background and Current Analysis
I did some research into the recent news surrounding 10 year yield curve inversion, as well as did some chart analysis. In short, backtesting the past yield inversion event, as well using the Ichimoku cloud (a reliable indicator which only signaled 4 times since the year 2000), there's no doubt we're heading into trouble within the next 8-18 months. Based on the fundamentals of the Trump economy, as well the 2019-2029 Congressional Budget outlook, it seems like the recent yield inversion parlays into the US government's future projections of contraction.
In the past, inverted yield curves have been a forerunner for stock-market downturns. On average, it takes eight months for the stock market to peak and start moving lower once the Treasury yield curve inverts. The reason it has such a good track record stems from the fundamentals that drive a yield curve inversion. When investors are nervous about the economic outlook for the future, they tend to buy longer-term Treasuries to protect their capital. This increase in demand for Treasuries drives the price of Treasuries higher, which in turn, drive the yield on Treasuries lower. If investors are nervous enough, they will even buy longer-term Treasuries that have lower yields than shorter-term Treasuries just to lock in the yield for a longer period of time in the anticipation that the Federal Reserve will eventually be forced to start lowering short-term rates to combat an economic slowdown, or recession.
Inverted Yield by The Numbers:
Institutional Sentiment
"The mood has investors betting the Bank of Canada and Federal Reserve will have to reverse course and lower their benchmark interest rates over the next few years. How accurate is the yield curve as a recession predictor? It correctly flagged each of the last three U.S. downturns several months in advance. Its record is a bit spottier in Canada, but sustained periods of yield-curve inversion were followed by recessions in the early 1990s and again in 2008.
So is a downturn looming? Not necessarily. There’s reason to think the yield curve might not be as accurate a recession predictor as it was in the past. Some global and structural factors (think quantitative easing, savings demand, low inflation) have put downward pressure on long-term interest rates. And while earlier periods of yield-curve inversion coincided with restrictive monetary policy, that’s not the case right now, even after rate hikes from the Bank of Canada and the Fed. Regardless, we shouldn’t be dismissive of recession risk. Both Canada and the U.S. are in the late stages of their business cycles, making it more likely that growth will surprise more to the downside than the upside.
Technical Analysis of the Charts
Assuming there is a crash based on the yield inversion (same as 2008), then here's the basic trends lines. (The next two months are critical- will we breakthrough all time highs, or bounce off the overhead resistance?).
I did some research into the recent news surrounding 10 year yield curve inversion, as well as did some chart analysis. In short, backtesting the past yield inversion event, as well using the Ichimoku cloud (a reliable indicator which only signaled 4 times since the year 2000), there's no doubt we're heading into trouble within the next 8-18 months. Based on the fundamentals of the Trump economy, as well the 2019-2029 Congressional Budget outlook, it seems like the recent yield inversion parlays into the US government's future projections of contraction.
In the past, inverted yield curves have been a forerunner for stock-market downturns. On average, it takes eight months for the stock market to peak and start moving lower once the Treasury yield curve inverts. The reason it has such a good track record stems from the fundamentals that drive a yield curve inversion. When investors are nervous about the economic outlook for the future, they tend to buy longer-term Treasuries to protect their capital. This increase in demand for Treasuries drives the price of Treasuries higher, which in turn, drive the yield on Treasuries lower. If investors are nervous enough, they will even buy longer-term Treasuries that have lower yields than shorter-term Treasuries just to lock in the yield for a longer period of time in the anticipation that the Federal Reserve will eventually be forced to start lowering short-term rates to combat an economic slowdown, or recession.
Inverted Yield by The Numbers:
- The 3-year Treasury yield – which is currently the lowest point on the yield curve – first inverted by dropping below the 1-month Treasury yield on March 7th.
- The 10-year Treasury yield (TNX) took a few weeks longer but finally dropped below the 1-month Treasury yield on March 22nd.
- Both the 20-year Treasury yield and the 30-year Treasury yield are still above the 1-month Treasury yield, but at the rate we’re going, we could see the entire long end of the yield curve inverted within the next month or two.
Institutional Sentiment
"The mood has investors betting the Bank of Canada and Federal Reserve will have to reverse course and lower their benchmark interest rates over the next few years. How accurate is the yield curve as a recession predictor? It correctly flagged each of the last three U.S. downturns several months in advance. Its record is a bit spottier in Canada, but sustained periods of yield-curve inversion were followed by recessions in the early 1990s and again in 2008.
So is a downturn looming? Not necessarily. There’s reason to think the yield curve might not be as accurate a recession predictor as it was in the past. Some global and structural factors (think quantitative easing, savings demand, low inflation) have put downward pressure on long-term interest rates. And while earlier periods of yield-curve inversion coincided with restrictive monetary policy, that’s not the case right now, even after rate hikes from the Bank of Canada and the Fed. Regardless, we shouldn’t be dismissive of recession risk. Both Canada and the U.S. are in the late stages of their business cycles, making it more likely that growth will surprise more to the downside than the upside.
Technical Analysis of the Charts
Assuming there is a crash based on the yield inversion (same as 2008), then here's the basic trends lines. (The next two months are critical- will we breakthrough all time highs, or bounce off the overhead resistance?).
