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March 2019 - The Bond Market

Investment Market Updates Justin's Notepad

The bond market is behaving strangely. At the moment, you can earn a higher yield buying a 1-year treasury bond than a 10-year treasury bond. This is what’s known as an inverted yield curve. Each time this has happened, a recession has followed. Scary, right?

• Is this concerning to me? Kind of. This indicator is batting 1.000 so, yeah, it’s a little concerning.

• Could this phenomenon be a meaningless result of data mining? That’s entirely possible.

• Could it be a symptom or indicator of a global recession and not a US recession? Maybe.

• Is there something you can do with this information that is actionable? Probably not. You can see below that the average lead time between inversion and a recession is 14 months. Other charts I’ve reviewed show a run-up in equity prices during that lead time, so if one were to react today, they’d be missing out on gains if history were to repeat itself. You all know by now I don’t believe in attempting to time the market.

Part of being a successful investor is knowing what you don’t know and accepting that as reality. Between now and whenever the next recession arrives, there will be no shortage of “experts” putting effort into trying to know the unknowable. Some will even guess things right and will look back and say “I knew it” – one of the most overused phrases in our language. We all have intuitions, and sometimes our intuitions prove to be right. As a result, we tend to overestimate our understanding of the past which leads to overconfidence in our ability to predict the future.

We always know that market declines are possible at any given moment. If you need access to your investments in the next few years, you should make sure you have some of your assets parked in something that is resistant to market swings.

Recessions are normal and they’ve always been temporary. If you have concerns, let’s talk.