Stock market investors are brushing off the recession warning of the yield curve — for now. Here is why.

In the blink of an eye and you missed it, but the yield of the 2 year Treasury note traded lower than the yield of the 10 year note on Tuesday afternoon, which temporarily reversed the yield curve and triggered the recession alarm bells.

Data show that at the moment when the treasury yield curve is reversed, short-term yields are higher than long-term yields, so there is no payment in the past to abandon stocks.

Not a good time tool

“Despite a good indicator of future economic woes, a reverse yield curve is not a good time tool for stock investors,” Brian Levitt, Invesco’s global market strategist, wrote in a March 24 note.

See: A key part of the Treasury yield curve has finally turned upside down, setting the recession alert – investors need to know here

“For example, investors who sold when the yield curve first turned upside down on December 14, 1988, missed 34% gains in the S&P 500 index,” Levitt wrote. “When it happened again on May 26, 1998, sellers missed a 39% increase in the market,” he said. “In fact, the average return of the S&P 500 index is 19% when the yield curve reverses the market peak each cycle.” (See table below.)

Invesco

Investors certainly did not go to the mountains on Tuesday. US stocks Ended with strong profitsTriggers a low jump and S&P 500 SPX in early March,
+ 1.23%
To exit the market reform that entered in February. Dow Jones Industrial Average DJIA,
+ 0.97%
Nasdaq Composite COMP, meanwhile, rose 338 points, or 1%.
+ 1.84%
1.8% advanced.

Step: S&P 500 exits

Reverse and what they mean

Usually the yield curve, a line that measures yield at all maturities, tilts upwards based on the time value of money. The reversal of curve signals that investors expect long-term rates to be below near-term rates is an event that has been widely taken as a signal of a possible economic downturn.

But there is a drawback as well. Levitt’s data from before 1965 shows that the average length between a reversal and a recession was 18 months – which corresponds to an average extension between a reverse start and the S&P 500 peak.

Furthermore, the researchers argued that a continuous reversal was necessary to transmit a signal, which has not yet occurred, but is widely expected.

Which curve?

Reversal of 2 year TMUBMUSD02Y,
2.322%
/ 10 year TMUBMUSD10Y,
2.411%
Measuring the yield curve has preceded all six recessions since 1978, with only one false positive, Rose Mayfield, Baird’s investment strategy analyst, said in a Monday note.

However, the researchers noted that the 3-month / 10-year spreadsheet, although found to be relatively reliable and highly popular among academics, is viewed equally. At the San Francisco Central Bank. Fed President Jerome Powell expressed interest in short-term action earlier this month measuring expectations for 3-month rates and 18-month 3-month rates in the future.

Mayfield, meanwhile, noted that the 3-month / 10-year spread is “far from the upside”.

See: Stock market investors should look at this part of the yield curve, the ‘best leading indicator of future issues’

In fact, the difference between the two measures, which are closely followed by the curve, is head-scratching for some market observers.

“Significantly, as of December 2021, 3m / 10s fell 2v / 10s, so the two always went hand in hand,” Deutsche Bank strategist Jim Reid said in a note Tuesday (see chart below).

Deutsche Bank

“There has never been such a diversion because of the central bank [has] They have never been ‘behind the curve’ like they are today, ”Reid said. “If the market pricing is right, they will catch up quickly next year, so in 12 months it will be possible” The 3-month / 10-year scale will be flat because short-term rates will rise as the central bank raises its benchmark. Policy rates.

Takeaway, Mayfield wrote, is a powerful indicator of the yield curve and at least signals a cooler economy.

“Corruption should be high and the barrier to investment success should be raised. But in the end, we think it is worthwhile to take the time to digest the big picture, without relying on any indicator,” he said.

In a chart: ‘Dam finally broken’: 10-year treasury gains spike to breach downward trend channel seen from mid-1980s

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