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Summary

Stock markets are panicking because of the inverted bond yield curve.
With a reason, because this indicator regularly predicted recessions and bear markets in the past.
Is it different, this time?

No, writing about panicking, I don't mean the Steem prices, although this could also be a reason for panic. (What if witnesses can’t pay the bills with a such low Steem price?) Yesterday, and today too, the main concern of US and international investors seems to be the “inverted yield-curve” of US bonds.

Delayed recession

That means, the long-term yields, for ten years, are below the short term, two years yield. That is a sign of recession, allegedly in seven cases of the last seven recessions, this indicator predicted well the process. Although, the shrinking of the economy came mostly much later, by the research of BoA-Merrill Lynch on average 15 months after the inverted curve began.

And, stock markets are pricing in the future, of course. If they expect a recession, or the expectations are worsening, stock prices fall. Very probably we are seeing this, now.

Bad reactions

On my chart you see two areas: on the downside, the difference between the 10 year and the 2 year US bond yields. If this difference falls below zero, investors are panicking. In the same area, I drew also the S&P 500 index, to see how the index is moving after the yield curve inverted. Bad, as we can see on the falls marked with the blue arrows.

(Click to view in higher resolution. Chart courtesy of Tradingview)

On the upper side, you see the same but with the German yield-difference (10y-2y), and the German DAX stock market index. We see almost the same events: After the inverted or almost inverted curves (yield differences below or near zero) happened a stock index fall in 2001-2003, in 2008-2009, and also one smaller slide in 2015-2016.

Is it different this time?

Shall we panic now? If you have a lot of shares, maybe. August and September aren’t the best months on stock markets either, historically. The trade war is going on, the markets are volatile. I think I should sell some risky assets tomorrow before I go on vacations.

Although, some experts, gurus are saying the bond prices are not pricing in a recession now. They are only very distorted by the world’s central banks “dovish”, money-printing monetary policies. This distorted prices can’t serve as a reliable indicator now.

We are not fools

In Europe not only the yield curve is inverted, but the yields are also perverted – I mean, abnormally low. (The 10-year German yield, below 0.6 percent p. a.) How the hell buys a bond with negative yield if the inflation is moving around 1.2.-1.4 percent p. a.? Are Europeans stupid? Do they like to lose?

The yields aren’t negative in Europe because people have so many fears that they are willing to pay for some security. Yields are in negative territory because the European Central Bank has bought so many bonds that they are scarce now. Some institutions like banks or insurance companies are obliged to buy bonds in some cases, at any price.

Even more incredible of the incredible

For other institutions, sometimes it is better to buy a bond with a –0.3 percent negative yield than put the money in a deposit by the central bank – with a –0.4 yield. Or, some speculators, institutions, hedge funds are thinking – and they were right until now – that bond yields can fall further. For example, if central banks lower interests even more. In this case, also the price of a negative-yield bond can surge even more and the investor wins.

The series “Chart Of The Day”

I started a series with the title “Chart Of The Day” because I see every day interesting events or phenomena on the markets or in the news. Other parts here:

The last ones:

Older ones:

(Cover photo: Pixabay.com)

Chart Of The Day: Can We Panic Now?