2020 Market Crash and Recession - #TNX #US03MY Yield Inversion
For the past couple weeks, essentially every media channels were screaming out about
US03MY
-
TNX
yield inversion. While more scrutiny is desired, we are essentially sitting at the crossroad with heavy down-pressure in our shoulder.
Just took a step back and looked at the big forest winding all the back to the 1980s.
Let's take a look and see what's happened in the past and where we are headed in terms of the yields (long-term vs short-term yields).
So what's the deal? How does this impact the investors and banks?
In a normal occasion, long-term investments require higher yields as it requires you to take risk for longer period of time.
When yield inversion occurs it wipes out the risk premium for the long-term investments. For you as an investor, you have no reason to take extra risk and opt-in for short term investments.
For banks that borrow short-term and lend long-term, their profit margins become slim, so they cut short-term bonds, pushing up yields even further. Central banks cut M2 supply, recession begins.
M2 supply as you many of you know already is a leading indicator of the markets, especially equity markets. When there is no GDP growth, there is no EQ growth, which will negatively impact the market overall. Including, but not limited to
RUT
,
SPX
/
SPY
,
DJI
. This will also spell cascade effects in markets rest of the world.
History doesn't have to repeat itself but these key indicators are not negligible either.
US03MY
-
TNX
yield inversion. While more scrutiny is desired, we are essentially sitting at the crossroad with heavy down-pressure in our shoulder. Just took a step back and looked at the big forest winding all the back to the 1980s.
Let's take a look and see what's happened in the past and where we are headed in terms of the yields (long-term vs short-term yields).
So what's the deal? How does this impact the investors and banks?
In a normal occasion, long-term investments require higher yields as it requires you to take risk for longer period of time.
When yield inversion occurs it wipes out the risk premium for the long-term investments. For you as an investor, you have no reason to take extra risk and opt-in for short term investments.
For banks that borrow short-term and lend long-term, their profit margins become slim, so they cut short-term bonds, pushing up yields even further. Central banks cut M2 supply, recession begins.
M2 supply as you many of you know already is a leading indicator of the markets, especially equity markets. When there is no GDP growth, there is no EQ growth, which will negatively impact the market overall. Including, but not limited to
RUT
,
SPX
/
SPY
,
DJI
. This will also spell cascade effects in markets rest of the world. History doesn't have to repeat itself but these key indicators are not negligible either.
Comment:
For added clarity, "Short" here indicates a short on assets and securities, not on TNX.