18 Nov Hiding an Inverted Yield Curve?
Mortgage bond prices are climbing higher so far this morning, fueled by pessimism out of China surrounding the trade war. This time, it is being blamed on President Trump’s unwillingness to roll back existing tariffs as part of the partial trade deal that is being negotiated. Since that is old news, and the market had very little reaction when that was originally announced, this is an interesting point of blame for stocks falling today. As we know, it will just be a short time before more good news is released and stock investors will once again be fooled. Just give it time.
The Federal Reserve continues to inject billions of dollars into the financial markets, which is also helping to boost stock prices higher. However, rather than invest in longer term maturity instruments, the Fed has chosen to invest in T-bills that have maturities of up to one year. The Fed is choosing the shorter term investments to help improve the yield curve so that we no longer have inverted yield curves. Since this is only hiding the symptom and not fixing the deeper issues, this is the equivalent of putting lipstick on a pig. An inverted yield curve is a precursor to a recession. It is also a symptom and not the cause of a recession. Further, since the investments will be paid back to the Fed within one year, how will investors feel when they begin to roll-off the Fed’s balance sheet? I assume the Fed has a plan. We will just have to wait to see how it plays out.
Although mortgage bonds have broken above their 25, 50 and 100 day moving averages, the 10-Year Treasury note yield is still in the battle. Until the 10-Year has also made a decisive break, there is great risk in locking. Be very careful if you choose to float. Breakouts are the exception and not the rule. It’s too early to celebrate. If stocks fall sharply, we will likely see that happen. Until stocks fall, we must remain cautious.