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Inverted US yield curve is not always gloomy for stocks

The U.S. government bond market is signaling concerns about an impending recession, but past experience suggests that the trend is not always a credible sign for the country’s stock market.

The “reverse yield curve” – when short-term government bonds offer higher yields than longer-term government debt – was generally perceived as an indicator of an impending economic contraction. and At the end of last month This indicator flashed red as the yield on two-year US bonds briefly rose above the 10-year yield for the first time since 2019.

Deutsche Bank became one of the first major banks to say that its basic economic forecasts now include a recession starting in late 2023. More than half of the institutional investors surveyed about the reversal by the Royal Bank of Canada said they were “very concerned” or “somewhat concerned” about the yield curve and 42% said they expect a recession before the end of next year.

Still, it may not translate into a stock market crash. The U.S. S&P 500 index returned a median of 9% in the 12 months after reversing the previous yield curve and 16% for two years, according to Goldman Sachs.

The data underscore the fact that although the bond market has a decent record as a warning sign, it often takes time to stretch.

“If we’re going to see a recession, it’s not going to be for a while,” said Jonathan Golub, chief equities strategist at Credit Suisse.

Markets also tend to recover faster from the wider economy – best illustrated by the rise that follows the initial wave of the corona plague.

The recent reversal in yields of two years and 10 years has since disintegrated. And even as parts of the yield curve have reversed in recent weeks, not every indicator has signaled an imminent problem. The gap between U.S. government debt and three months to 10 years, for example, remains much larger than it was earlier this year.

“A large part of the academic work indicates that [spread between three-month and 10-year Treasuries] It’s a better indicator of a recession and that it looks more like the economy is hot, “Golub said.

Despite this, Goldman’s strategists point to the 1973 experience as a precaution. So, the yield curve was reversed while inflation rates were as high as they are today. The S&P 500 was down 19% in 12 months and down 31% over the next two years.

Inverted US yield curve is not always gloomy for stocks Source link Inverted US yield curve is not always gloomy for stocks

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