How Worried Should You Be About The Yield Curve?

As the yield curve flattens, investors continue to worry about the potential implications for the economy and markets. Why? Inverted yield curves have a perfect history of predicting economic recessions over the past 50 years.

The yield curve is a graphical representation of bond yields of similar credit quality across a range of maturities. A flattening curve, when shorter-term rates rise more quickly than longer-term rates (or fall more slowly), is often perceived as an indication that slower economic growth lies ahead. An inverted yield curve, where short-term rates are higher than long-term rates, has historically been a precursor to a recession.

Earlier this year, the difference between the 2- and 10-year Treasury yields was down to 0.50% before bouncing some, but it is currently back down to 0.54% (as of Thursday’s close). Does this mean trouble is around the corner? Looking back at the previous five recessions, once the yield curve hit 0.5% it took a median of nearly a year before the curve inverted. Once it inverted, it took about 20 more months until a recession started. All along the way, the S&P 500 posted a median return of 21.5% over those 32 months.

“A flattening (or inverted) yield curve can be concerning, but everyone makes it sound like that means a recession will start tomorrow. History says otherwise,” said Ryan Detrick, Senior Market Strategist. “Don’t forget we are looking at record profits and revenues for the S&P 500 in 2018 amid multi-decade highs in manufacturing and services, along with soft data indicators such as consumer confidence. In other words, the economy is still on quite firm footing, and we see few reasons to expect a recession over the next 12-18 months.”

 

IMPORTANT DISCLOSURES

Treasuries are a marketable, fixed-interest U.S. government debt security. Treasury bonds make interest payments semi-annually and the income that holders receive is only taxed at the federal level. Treasuries are subject to market and interest rate risk if sold prior to maturity.

Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal and potential illiquidity of the investment in a falling market.

The S&P 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. The economic forecasts set forth in this material may not develop as predicted. All indexes are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. All performance referenced is historical and is no guarantee of future results.

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.

This research material has been prepared by LPL Financial LLC.

To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial LLC is not an affiliate of and makes no representation with respect to such entity.

The investment products sold through LPL Financial are not insured deposits and are not FDIC/NCUA insured.  These products are not Bank/Credit Union obligations and are not endorsed, recommended or guaranteed by any Bank/Credit Union or any government agency.  The value of the investment may fluctuate, the return on the investment is not guaranteed, and loss of principal is possible.

Member FINRA/SIPC

For Public Use— Tracking # 1-712821 (Exp. 03/19)