When life throws you an inverted yield curve

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When life throws you an inverted yield curve

If you’re the kind of person who stresses out about the uncertainties in the marketplace, you have lots of buzz out there to fuel your doubts.

The most recent call for calamity was about a specific economic situation that in the past has foretold the onset of a recession. You may have heard the media screaming about an inverted yield curve.

Instead of panic, we like to spread knowledge, so here’s our take on today’s inverted yield curve and why the doom and gloom may be just a titch overstated.

So what the heck is an inverted yield curve anyhow? It happens when longer-term bond yields are lower than shorter-term bond yields.

How does that affect the economy? It can cause an adverse affect on investor expectations. The more skittish investors are about future economic growth, the more likely they are to lower their forecast for interest rates. So we get a situation like today when current interest rates appear attractive compared with what’s expected in the future. That leads some investors to buy long-term bonds to lock in today’s interest rates, which causes long-term bond yields to fall.

So how good a predictor is an inverted yield curve of a coming recession? Sure, you can point to the fact that an inverted yield curve has preceded almost every recession in the past 50 years. But let’s not forget that some investors have based their assessment of market prospects based on which American football conference wins the Super Bowl.

The reality is it is almost impossible to truly predict an oncoming recession. Even the most advanced economists are yet to identify a reliable model for the prediction of a recession. That fact is made painfully obvious by the probability of a recession as estimated using these different models. For the coming year, the range is between 20% to more than 60%. In other words, there’s no consensus.

We take the long-term prudent approach. We keep our eyes on all the important indicators, but we don’t pronounce a recession is in sight without a lot more evidence.

How many times have you been sitting on the sidelines when solid investment gains were readily achievable?

We believe that decisions made in the heat of the moment on scant data are the worst choices for your portfolio.

That’s why we always prefer to talk to our clients about their concerns. While many are valid, we don’t want our clients going through sleepless nights because the media is lacking a story, or because there’s uncertainty. There’s always uncertainty. As individuals, we have to cope with it. One of our major responsibilities – as we see it – as financial advisors, is to help our clients understand both risks and rewards.

We hope this helps put your mind at ease. If it will help a friend, colleague or family member gain some extra peace of mind, please forward this post to them.

Again, thanks again for reading our posts,


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This information has been prepared by Barbara & Eric Chong who are Financial advisor for Investia Financial Services Inc., and does not necessarily reflect the opinion of Investia. The information contained in this newsletter comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors. The Financial Advisor can open accounts only in the provinces in which they are registered. For more information about Investia, please consult the official website atwww.investia.ca

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