The bond markets have been consistent in their message that the inverted yield curve is certainly something to take note of, but CNBC market analyst Ron Insana warns economists not to dismiss the recession signal.
“The incessant drumbeat that the yield curve inversion is a false sign of recession is pushing me to do something almost impossible—tear my hair out,” Insana wrote. “I am growing increasingly concerned about the consistent, and persistent, lack of concern about the inversion of the yield curve among professional economists, some decisionmakers at the Federal Reserve and financial pundits. They claim that this inversion is different than those of prior vintage.”
Insana is quick to point out the inverted yield curve as a reliable indicator given its history of recession warnings. Per Insana, “Since 1955, or 1967, depending on whose studies you quote, a domestic recession has been preceded by an inversion of the yield curve (where interest rates on long-term bonds are lower than short-term rates) 100% of the time.”
The recent market volatility has been sending investors scrambling for safe haven assets like government debt. As such, bond prices have been climbing while Treasury notes have been yielding lows—since both move conversely with one another.
“The current and contrary argument suggests that negative yielding sovereign debt, totaling roughly $17 trillion, is forcing investors to stretch for positive yields, forcing them into Treasurys and sending a false signal about an impending recession,” Insana noted. “Others suggest that mechanical and technical buying by pensions and other large savings pools that are derisking their portfolios is behind the surge of cash into U.S. bonds, rendering the predictive powers of the yield curve moot.”
Where can investors begin looking for yield in this challenging fixed income environment? One area is quality-focused corporate bond exchange-traded funds (ETFs).
Options include the iShares Intermediate Credit Bond ETF (NASDAQ: CIU), iShares iBoxx $ Invmt Grade Corp Bd ETF (NYSEArca: LQD) and Vanguard Interm-Term Corp Bd ETF (NASDAQ: VCIT).
CIU tracks the investment results of the Bloomberg Barclays U.S. Intermediate Credit Bond Index. CIU focuses on investment-grade corporate debt and sovereign, supranational, local authority and non-U.S. agency bonds that are U.S. dollar-denominated and have a remaining maturity of greater than one year and less than or equal to ten years.
LQD seeks to track the investment results of the Markit iBoxx® USD Liquid Investment Grade Index composed of U.S. dollar-denominated, investment-grade corporate bonds. LQD allocates 95 percent of its total assets in investment-grade corporate bonds to mitigate credit risk.
VCIT seeks to track the performance of a market-weighted corporate bond index with an intermediate-term dollar-weighted average maturity, namely the Bloomberg Barclays U.S. 5-10 Year Corporate Bond Index. While VCIT holds debt issues with maturities between 5 and 10 years, they are all investment-grade holdings to minimize default risk.
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