Inverted Yield Curve Worries Are Reentering the Market

An inverted yield curve, which can indicate that a recession could be forthcoming, is reentering the  current financial vernacular once again and sparking fears in the bond markets. The gap between the 3-month and 10-year Treasury yields fell to less than 5 basis points, according to a CNBC report.

This was seen last May until it reverted back in October. Per the report, the “New York Fed tracks the relationship and establishes a probability based on the spread. As 2019 ended, the recession chance stood at 23.6%, still elevated but a far cry from the nearly 40% reading as the curve inverted. Fed officials, who conclude their two-day policy meeting Wednesday, may again have to grapple with the prospects of a slowing economy, if the bond market is right about prospects ahead.”

“While the Fed may want to portray its 2020 rate policy as stable, markets are signaling that their bias should be to further easing,” said Nicholas Colas, co-founder of DataTrek Research.

Recession fears would certainly spark a consistent move to bonds, which happened in 2019 as fixed income ETFs reached record levels. Right now, we’re once again seeing a move to safe haven assets as the coronavirus is infecting the capital markets.

“While the coronavirus has captured the market’s attention over the last week Fed policy will return to the fore [Wednesday] and it will be an awkward transition,” Colas said. “There’s not much the Federal Reserve can say; they are in the same boat as investors when it comes to evaluating what will happen next.”

Will investor reactions to the inverted yield curve be overblown or will international equities capitalize off potential weakness ahead for the U.S. economy? Investors sensing the opportunity can look to relative weight exchange-traded funds (ETFs) to take advantage of any disparity between how the U.S. markets will react versus the international markets.

For investors who may be sensing continued upside in U.S. equities over international equities, the Direxion FTSE Russell US Over International ETF (NYSEArca: RWUI) offers them the ability to benefit not only from domestic U.S. markets potentially performing well, but from their outperformance compared to international markets.

RWUI features:

  • Seeks investment results, before fees and expenses, that track the Russell 1000®/FTSE All-World ex US 150/50 Net Spread Index (the “index”).
  • The fund, under normal circumstances, invests at least 80% of its net assets (plus borrowing for investment purposes) in securities that comprise the Long Component of the index or shares of exchange-traded funds (“ETFs”) on the Long Component of the index.
  • The index measures the performance of a portfolio that has 150% long exposure to the Russell 1000® Index (the “Long Component”) and 50% short exposure to the FTSE All-World ex US Index (the “Short Component”).

For investors looking to play the international equities over U.S. equities angle, the Direxion FTSE International Over US ETF (NYSEArca: RWIU) gives investors the opportunity to capitalize on this hunch.

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