YIELD CURVE INVERSION

The yield curve is currently negatively inverted, bond investors are signaling a possible recession on the horizon.  Investors need to incorporate this ‘recessionary signal’ into their investment management strategy. 

In the past an inverted yield curve has typically preceded a recession, in the chart below we see that in inverted yield curve has preceded the past three recessions.

When a person buys a U.S. Government bond they are lending to the government.  Investors demand a higher interest rate the longer they are going to be lending their money, 10 year rates are higher than 5 year rates which are higher than 2 year rates and so on.

When the scenario is reversed and short-term rates are higher than long term rates this is referred to as an ‘inverted yield curve’.  The 10 year v. 3 mo. yield curve is currently inverted (see below, source: FRED Federal Reserve Bank of St. Louis).

Investors are telling you that they are seeing lower growth, and prefer safety over a higher rate of return, when they will buy longer term bonds and accept a rate that is lower than shorter term bonds.

The yield curve serves as a proxy for the bond markets’ future growth expectations.  An inverted yield curve means that the bond market is forecasting a possible recession (a negative growth rate for the economy sometime over the coming 12 to 24 months).

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DEFINITIONS

FRED: Federal Reserve Economic Data – a database maintained by the Research division of the Federal Reserve Bank of St. Louis that has more than 500,000 economic time series from 87 sources.  The data can be viewed in graphical and text form or downloaded for import to a database or spreadsheet, and viewed on mobile devices.  They cover banking, business/fiscal, consumer price indexes, employment and population, exchange rates, gross domestic product, interest rates, monetary aggregates, producer price indexes, reserves and monetary base, U.S. trade and international transactions, and U.S. financial data.  The time series are compiled by the Federal Reserve and many are collected from government agencies such as the U.S. Census and the Bureau of Labor Statistics.

IMPORTANT DISCLOSURES

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security.  This memorandum is being made available for educational purposes only and should not be used for any other purpose.

The information contained herein does not constitute and should not be construed as representation or solicitation for the purchase or sale of any security or related financial instruments in any jurisdiction.  To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.

Investing involves risks including possible loss of principal.  Past performance does not guarantee future results.  Any investment or investment strategy outlined herein are not suitable for all investors, readers should conduct their own review and exercise judgment prior to investing.  Wherever there is the potential for profit there is also the possibility of loss.  No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.

This report expresses the opinions and views of the author as of the date indicated and are based on the author's interpretation of the concepts herein, and may be subject to change without notice.  Neither Highcroft, Inc., Gerald Asplund, nor LPL Financial, has no duty or obligation to update the information contained herein. 

To the extent you are receiving investment advice from a separately registered independent investment advisor or broker, please note that Highcroft, Inc., Gerald Asplund, and LPL Financial are not an affiliate of and makes no representation with respect to such entity.

Certain information contained herein concerning economic trends, Fundamentals, and/or Technical analysis, and performance is based on or derived from information provided by independent third-party sources.

The economic forecasts set forth in this material may not develop as predicted.

Technical analysis is generally based on the study of price movement, volume, sentiment, and trading flows in an attempt to identify and project price trends. Technical analysis does not consider the fundamentals of the underlying corporate issuer.

The sources from which information has been obtained is assumed to be reliable; the accuracy of such information is not guaranteed and the accuracy and completeness of such information has not been independently verified.

From time to time the publisher, his associates or members of his family may have a position in the securities mentioned in this report: This report, including the information contained herein, has been prepared exclusively for the use of Highcroft, Inc. clients, and may not be copied, reproduced, redistributed, republished, or posted in whole or in part, in any form without the prior written consent of Highcroft, Inc.

All indexes are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. All performance referenced is historical and is no guarantee of future results.  Investing in the index would require investors purchase an investment product, which would involve fees and expenses.

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Highcroft Investment Advisors serves as a 3(21) and 3(38) Investment Advisor and fiduciary for labor union supplemental 401(k) and pension plans and corporate 401(k) plans.  Highcroft works with the union's counsel, recordkeeper, administrator, and the plan's trustees.  United Association, Plumbers, Pipefitters, Steamfitters, IBEW, and Carpenters.  Serving Wisconsin and Minnesota.  401(k) investment management provided through LPL Financial's corporate RIA - offering 3(21) and 3(38) services.

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