The sky is falling once again after the 30-year Treasury bond dropped to a new all-time low. Even worse, the yield curve inverted further as fixed-income investors piled in to government debt.
Early this morning, the 30-year bond sunk as low as 1.905%, breaking its former record low of 1.916% from just a few weeks ago. The 30-year yield rose slightly after today’s initial dip, but still sits comfortably below shorter term U.S. bonds, like the 1-month and 3-month.
And right alongside the 30-year, the 10-year Treasury note yield also slid (1.461%), falling further below the 2-year (1.508%). If rates close this evening out around their current values, it will have been the third consecutive day in which the 10-year/2-year yield spread remains inverted.
Which, according to bond traders and analysts, would be a big warning sign that a recession is coming. The last three times the 10-year/2-year yield spread stayed inverted this long, a recession followed 18 months (on average) later.
In December 2005, for example, that specific spread inverted a little over 2 years before the financial crisis.
Are we in for another recession of the same ferocity?
After all, the trade war is still raging and a presidential election awaits in the not-too-distant future – the results of which could have a dire effect on the market.
Worse yet, Europe has dug themselves a grave and filled it with negative-yielding corporate debt. Should an economic revival befall the European Union – something that will eventually happen – yields on those bonds are bound to rise.
When they do, European institutional investors will take huge losses as negative rate corporate bonds flip positive, dropping 50% in value nearly overnight.
The world’s going to hell in a handbasket, isn’t it?
Good thing nobody told American consumers, who kept the Consumer Confidence Index (CCI) right near its all-time high over the last few weeks.
The CCI, as its name suggests, measures consumer confidence with respect to the economy in the near future. It’s based on the concept that if consumers are indeed optimistic, they’ll purchase more goods and services, inevitably stimulating the economy.
Economists expected the CCI to drop to 127.8 for its latest reading. Instead, it clocked in at 135.1 for the month of August, blowing away analyst estimates.
Have American shoppers lost their minds? A recession is undoubtedly coming! We should be hunkering down for the inevitable economic reckoning.
Not buying flat screen televisions.
But recent earnings out of the consumer discretionary sector confirm that the CCI is right on the money. Target (NYSE: TGT), for example, saw a huge lift in foot traffic and sales last quarter.
All while the financial media tried to scare us into submission.
Sorry folks, it’s not going to happen. Not while 2-for-1, end of summer sales are going on.
And while everyone’s busy freaking out about the yield curve, we need to examine whether it’s really time to panic or not. The economy is still firing on all cylinders and as long as its growth can outpace recession fears, America could be free and clear of a significant slowdown.
Especially if Trump manages to stay in the oval next year. Even though he’s drawn plenty of flak from virtue-signaling CEOs, they know that any of the leading Dems would be bad for business if they won. Having a president that wants to ban stock buybacks – one of the most important tools available to corporations – would wreak havoc on the market, and eventually, the economy.
Over the next few weeks, we’ll continue to hear about how the yield curve is in jeopardy. We’ll also see analysts pointing to the inversions, as if they were proof that the end is near. But remember, a yield curve inversion is only a symptom of an economic recession, NOT the cause.
The conditions these days are far different than December 2005, the last time the 10-year/2-year yield spread inverted. Rates are extremely low and growth hasn’t been artificially stifled in the slightest. In fact, it appears as though the Fed is going to get even more dovish before anything else.
And as earnings season rolls by, corporate revenues should continue to impress, proving to plenty of investors that a recession might just be avoided altogether.
If that happens? Sentiment will shift in a hurry, and the major indexes will scream to new all-time highs in a bull run continuation for the ages.
So, before we all let the inverted yield curve get us down, let’s at least wait for the current earnings season to finish. If I’m right, and America’s top firms come out of Q3 looking good, yields will undoubtedly rise as investors clamor to get back in on the equity action.
Un-inverting the yield curve in the process, and returning the bond markets to “business as usual”.