As long as the 3-mo. and 10-yr. are inverted (as they are now), it's best to invest on the conservative side of your guidelines. This stock market correction may not last long because quality spreads are still narrow and the long end of the curve - ten years on out- is still normal.
4 comments:
Deb,
For the 3 month data, are you using the "Treasury constant maturities (Nominal) 3 month" from the Fed's site?
Because there is also a 3 month "Treasury bill (secondary market)" This always comes in slightly lower than the constant maturity (currently at 4.94%) and makes a big difference right now in determining an inversion.
Brian
Hello Debra,
I am currently reading your excellent book.
In it, I just read that you recommend buying real estate or REITs during an inverted curve. Do you recommend REITs at this time?
Morey
Hello again Debra,
A friend of mine just sent me an interesting article...a small part of which i have pasted below. This section addresses what some call "front door" inversion, where the Fed Funds rate is larger than the 10 yr Tbond rate. I don't recall you specifically mentioning this in your book, though you do talk about the Fed Funds rate in general. Please comment on this..is a recession imminent?
Morey
Yield Curve Inversion
In late June, the Federal funds rate rose above the ten year Treasury note yield. This was a result of the Fed forcing the Fed funds rate higher while the ten year did not follow suit. Sometimes this is referred to as a "frontdoor" inversion. According to Expectations Theory, market investors, on average, held the view that the economy was already slowing, creating the likelihood of interest rate declines at a later date, and this fact was more important to investors than the Fed's hike in the Federal funds rate.
Over the prior 55 years, the Federal funds rate has exceeded the ten year note yield only eight times. Six of the inversions were followed by recessions. The 1966 inversion was followed by a severe slowdown, but a recession was avoided because of substantial increases in Vietnam War military spending, Lyndon Johnson's Great Society Welfare program, and a dramatic and rapid easing in Fed monetary policy under the leadership of William McChesney Martin. A 1998 inversion, unlike the earlier seven, was of the "backdoor" variety caused by a drop in ten year yields, not a rise in the Federal funds rate. If we exclude the "backdoor" inversion of 1998 since it was of a different type, recessions occurred after six of the seven previous "frontdoor" inversions
Dear Friends,
I'll try to answer all of your excellent questions at once: I had to use the Treasury's constant 3-mo. for my research. I invest with the WSJ's data on p. C-1 for the 3-mo. yield in the secondary market. The same is true for the 10-yr. note. I do not expect a recession because quality spreads are so narrow. I would not buy REITs now for that reason.
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