Inverting US yield curve
Discussion
As always, the answer will only be known with hindsight, and you will be familiar with the concept of "not relying on past performance".
IMO the debt market is all over the place, not just the slight yield curve inversion. Some say the high yield market doesn't have the capacity to absorb BBB if they get downgraded to BB; some say there isn't enough risk premium to justify buying high yield compared with equities; some say the equity markets are starting to look shaky; others say everything will be fine. Take your pick.
I adjusted my position some months ago for the now unfolding Brexit disaster and Donald Trump's tantrums so am now holding on tight for the ride!
IMO the debt market is all over the place, not just the slight yield curve inversion. Some say the high yield market doesn't have the capacity to absorb BBB if they get downgraded to BB; some say there isn't enough risk premium to justify buying high yield compared with equities; some say the equity markets are starting to look shaky; others say everything will be fine. Take your pick.
I adjusted my position some months ago for the now unfolding Brexit disaster and Donald Trump's tantrums so am now holding on tight for the ride!
"Michael Bauer and Thomas Mertens have produced a piece of research for the Federal Reserve Bank of San Francisco that shows “An inversion of the yield curve has been a reliable predictor of recessions.”
How reliable you ask?
The three most used spreads representing the yield curve inversion that they test “all have very similar predictive accuracy…” and range from 85 percent accuracy to 89 percent accuracy."
https://seekingalpha.com/article/4202682-inverted-...
Although I don't believe it has currently inverted.
How reliable you ask?
The three most used spreads representing the yield curve inversion that they test “all have very similar predictive accuracy…” and range from 85 percent accuracy to 89 percent accuracy."
https://seekingalpha.com/article/4202682-inverted-...
Although I don't believe it has currently inverted.
clubsport said:
When riskier asset classes such as equities sell off, particularly from an elevated level you tend to find the money goes into the front end of government/sovereign bond curves (mostly out to 2yrs).
This effectively steepens the curve, if the sell off continues much further in equities this will have the effect of reducing the likelihood of further US rate rises in 2019. Rates in UK , Europe will be going nowhere for longer and certainly not higher!
A major component of a sell off such as this, is often based on existing positions and the focus is more about of return OF capital, rather than return ON capital.
+1This effectively steepens the curve, if the sell off continues much further in equities this will have the effect of reducing the likelihood of further US rate rises in 2019. Rates in UK , Europe will be going nowhere for longer and certainly not higher!
A major component of a sell off such as this, is often based on existing positions and the focus is more about of return OF capital, rather than return ON capital.
Edited by clubsport on Thursday 6th December 19:35
Exactly this, it's how we respond to a classic 'risk off' decision on equities.
The actual return on debt is not material, it's just somewhere liquid to park cash while the equity market retreats.
I would add as well that in my experience, equity houses generally don't 'get' debt (and vice versa) and won't get too cute on actual curve positioning.
Helicopter123 said:
clubsport said:
When riskier asset classes such as equities sell off, particularly from an elevated level you tend to find the money goes into the front end of government/sovereign bond curves (mostly out to 2yrs).
This effectively steepens the curve, if the sell off continues much further in equities this will have the effect of reducing the likelihood of further US rate rises in 2019. Rates in UK , Europe will be going nowhere for longer and certainly not higher!
A major component of a sell off such as this, is often based on existing positions and the focus is more about of return OF capital, rather than return ON capital.
+1This effectively steepens the curve, if the sell off continues much further in equities this will have the effect of reducing the likelihood of further US rate rises in 2019. Rates in UK , Europe will be going nowhere for longer and certainly not higher!
A major component of a sell off such as this, is often based on existing positions and the focus is more about of return OF capital, rather than return ON capital.
Edited by clubsport on Thursday 6th December 19:35
Exactly this, it's how we respond to a classic 'risk off' decision on equities.
The actual return on debt is not material, it's just somewhere liquid to park cash while the equity market retreats.
I would add as well that in my experience, equity houses generally don't 'get' debt (and vice versa) and won't get too cute on actual curve positioning.
Derek Chevalier said:
rockin said:
some say there isn't enough risk premium to justify buying high yield compared with equities
I don't understand the high yield bond argument - they behave like equities just when you don't want them to, so if you want more return why not buy more equities instead?The thing is with High Yield bonds is that they are idiosyncratic instruments....the devil is in the detail and 90% of people that buy them (including the professionals) don't read and probably understand that detail. Some HY bonds can have a lot of investor protection.....others have more legal loopholes than a piece of Swiss Cheese. Typically $ HY bonds issued by US companies have decent covenants....European investors tend to be less sophisticated. Also HY bonds that were originally issued by companies that were formerly investment grade will be just typical senior unsecured debt.
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