Yield Curve Inversion a 'Problem for Everything,' Epstein Says

Things could get even more bearish with recession signals emanating from the bond markets. Fears of an inverted yield curve racked the markets during 2018’s fourth quarter sell-off, but they returned on Friday as the short-term 3-month and longer-term 10-year yield curve did as such–unveil an inversion that hasn’t been seen since 2007–just ahead of the financial crisis.

“Could it be that the yield curve is signaling weak global economic growth and low inflation without necessarily implying a recession in the US? We think so, and the US stock market apparently supports our thesis,” Ed Yardeni of Yardeni Research said in his morning note Friday. “So why are global stock markets also doing so well? Perhaps there is too much pessimism about the global economic outlook.”

The spread between the 3-month and 10-year notes fell below 10 basis points for the first time in over a decade. This strong recession indicator contrasted a more upbeat central bank on Wednesday, but investors were quick to sense the cautiousness.

During Wednesday’s interest rate announcement by the Fed, Chairman Jerome Powell gave mention to the strength of the economy, but did acknowledge that economic concerns exist domestically and abroad.

“We continue to expect that the American economy will continue to grow at a solid pace in 2019 although likely lower than the very strong pace in 2018,” said Powell. “We believe our current policy stance is appropriate.”

“Since last year, we’ve noted some developments at home and around the world that bear our close attention,” Powell added. “Given the overall favorable conditions in our economy, my colleagues and I will be patient in assessing what, if any, changes in the stance of policy may be needed.”

Notice of the use of “bear” in Powell’s statement. Sometimes when market losses are more than an investor can bear, it may be better to take the other side and just be the bear.

In the video below, in “Futures In Focus,” Ira Epstein of the Ira Epstein Division of Linn & Associates discusses the inversion of the 3-month and 10-year yield curve. He speaks with Bloomberg’s Vonnie Quinn on “Bloomberg Markets.”

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