Jittery investors who are looking to the indexes for signs of an
approaching bear market might do better by focusing their attention
elsewhere: on the yield curve. So says Jeffrey Kleintop, chief
market strategist at LPL Financial, who asserts in a note Tuesday
that the yield curve has a perfect track record of predicting the
top of the stock market over the past 50 years, and it’s not
signaling a bear market right now.
Shutterstock
The yield curve is another way of describing the difference between
short-term Treasury yields and long-term yields. It’s a favorite
tool among financial and economics wonks because of what it says
about the economy. The widening between the yields of different
maturities,
known as a steepening curve, often signals a brightening
economic outlook. On the contrary, if the curve flattens
considerably, the growth outlook tends to be souring.
If the Federal Reserve aggressively hikes its key policy rate,
short-term Treasury yields in turn rise swiftly. If short-term
yields climb higher than long-term rates, the curve is said to
invert. An inverted yield curve is generally a sign that a
recession is about to begin, which means that it’s also a predictor
of the top of a bull market in equities, says Kleintop.
There are a number of different Treasury maturities one can use to
calculate the yield curve, but Kleintop chooses to find the spread
between the 3-month T-bill
3_MONTHand the 10-year note
10_YEAR-2.52%. Here’s where that differential has turned negative over
the past 50 years, and how it compares with the S&P 500
index
SPX-0.24%:
Writes Kleintop:
“Every recession over the past 50 years was preceded by the Fed
hiking rates enough to invert the yield curve. That is seven out of
seven times — a perfect forecasting track record. The yield curve
inversion usually takes place about 12 months before the start of
the recession, but the lead time ranges from about five to 16
months. The peak in the stock market comes around the time of the
yield curve inversion, ahead of the recession and accompanying
downturn in corporate profits.
So now you’re worried about when the curve will invert. The yield
curve has
certainly been flattening over the last half year as bond
investors fret about when the Fed will begin hiking its lending
rate, which has been pegged near zero for the past half decade. But
the good news is that the curve is still steep — and certainly a
long ways from inverting. Here’s what the curve looked like on
Monday:
As Kleintop writes:
“Even if long-term rates stay at the very low yield of 2.6%, to
invert the yield curve by 0.5% the Fed would need to hike rates
from around zero to over 3%! Based on the latest survey of
current Fed members that vote on rate hikes, conducted earlier this
year, members do not expect to raise rates above 3% until sometime
in 2017, at the earliest. The facts suggest the best indicator for
the start of a bear market may still be a long way from signaling a
cause for concern.
not likely to see this scenario under the current FOMC
leadership. we are going to be seeing low short term interest rates
for a sustainted period (whatever that means). thus to see the 3
month tbill yield above the 30 year bond yield anytime soon would
be fantasy.
though I doubt well see rates back to the 2012 lows, personally
I think was the 30 year bottom of the secular bear market in rates
for the 10 and 30 year bond yields
yeah a reversion to mean pullback is coming probably this year
sometime, doesn't have to be now, but like the sun rising and
setting, it will eventually come to re test the 50 week MA or the
200 day MA for the Dow and SPX and you always undercut them
slightly
Newsletter
Subscribe to our email list for regular free market updates
as well as a chance to get coupons!
article today, argues the yield curve has correctly predicted bear markets for 50 years
Posted by steve101 on 14th of May 2014 at 11:33 am
Bear market won’t come until the yield curve says so: Kleintop
Jittery investors who are looking to the indexes for signs of an approaching bear market might do better by focusing their attention elsewhere: on the yield curve. So says Jeffrey Kleintop, chief market strategist at LPL Financial, who asserts in a note Tuesday that the yield curve has a perfect track record of predicting the top of the stock market over the past 50 years, and it’s not signaling a bear market right now.
The yield curve is another way of describing the difference between short-term Treasury yields and long-term yields. It’s a favorite tool among financial and economics wonks because of what it says about the economy. The widening between the yields of different maturities, known as a steepening curve, often signals a brightening economic outlook. On the contrary, if the curve flattens considerably, the growth outlook tends to be souring.
If the Federal Reserve aggressively hikes its key policy rate, short-term Treasury yields in turn rise swiftly. If short-term yields climb higher than long-term rates, the curve is said to invert. An inverted yield curve is generally a sign that a recession is about to begin, which means that it’s also a predictor of the top of a bull market in equities, says Kleintop.
There are a number of different Treasury maturities one can use to calculate the yield curve, but Kleintop chooses to find the spread between the 3-month T-bill 3_MONTH and the 10-year note 10_YEAR -2.52% . Here’s where that differential has turned negative over the past 50 years, and how it compares with the S&P 500 index SPX -0.24% :
Writes Kleintop:
This puts Kleintop in the same camp as Jonathan Golub, chief U.S. market strategist at RBC Capital Markets, who also claims the the bull market has more room to run because a recession isn’t imminent.
So now you’re worried about when the curve will invert. The yield curve has certainly been flattening over the last half year as bond investors fret about when the Fed will begin hiking its lending rate, which has been pegged near zero for the past half decade. But the good news is that the curve is still steep — and certainly a long ways from inverting. Here’s what the curve looked like on Monday:
As Kleintop writes:
yield curve inversion - not happening
Posted by hazbin1 on 14th of May 2014 at 11:47 am
not likely to see this scenario under the current FOMC leadership. we are going to be seeing low short term interest rates for a sustainted period (whatever that means). thus to see the 3 month tbill yield above the 30 year bond yield anytime soon would be fantasy.
though I doubt well see
Posted by matt on 14th of May 2014 at 12:47 pm
though I doubt well see rates back to the 2012 lows, personally I think was the 30 year bottom of the secular bear market in rates for the 10 and 30 year bond yields
doesn't mean we can't have
Posted by ruscitti on 14th of May 2014 at 11:41 am
doesn't mean we can't have a 10-15% correction and undercut the 200 day ma..
yeah a reversion to mean
Posted by matt on 14th of May 2014 at 12:55 pm
yeah a reversion to mean pullback is coming probably this year sometime, doesn't have to be now, but like the sun rising and setting, it will eventually come to re test the 50 week MA or the 200 day MA for the Dow and SPX and you always undercut them slightly