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BlackRock's Fink Warns Of Risk Of Inverted Bond Yield Curve
Thanks, Ted. The yield curve inverted in early 2006, 18 months before the topping process began in the market. Historically, it's a leading indicator. I'm not sure why Blackrock is sounding the warning of a possible inverted yield curve.
From the article: Despite nearly nine years of gains in U.S. stock markets, investors are flocking to bonds. ... U.S. based bond funds have brought in more than $2 for every $1 gathered by equity funds this year ... BlackRock alone reported nearly $60 billion in bond fund inflows and another $20 billion in “cash management” products that also invest in debt during the third quarter, compared to $12 billion for equity funds.
That explains Fink’s concerns looking out a year or two. Interesting conundrum. On one hand, investors are seeking shelter from what they perceive as expensive equity markets. On the other hand, they’re avoiding cash and the short end of the curve because they yield next to nothing. As a consequence, longer bonds are pulling in money. If that continues long enough it could drive down long term rates to levels below what shorter paper yields. That’s rate inversion. Yes, it is often a precursor of recession.
What I think is different here is that usually the inversion is brought about by central banks raising rates at the short end to choke off an overheating expansion. But in the case Fink outlines, it would be a result of investors piling into the longer end of the curve in search of yield. But investors aren’t that dumb - are they?
On one hand, investors are seeking shelter from what they perceive as expensive equity markets.
Thoughtful post, Hank.
On the point above, I'm not sure that's the only explanation. As Americans (and particularly its wealthy boomers) age (and live longer than ever), advisors are reducing their equity exposure and weighting their portfolios more towards bonds.
Comments
That explains Fink’s concerns looking out a year or two. Interesting conundrum. On one hand, investors are seeking shelter from what they perceive as expensive equity markets. On the other hand, they’re avoiding cash and the short end of the curve because they yield next to nothing. As a consequence, longer bonds are pulling in money. If that continues long enough it could drive down long term rates to levels below what shorter paper yields. That’s rate inversion. Yes, it is often a precursor of recession.
What I think is different here is that usually the inversion is brought about by central banks raising rates at the short end to choke off an overheating expansion. But in the case Fink outlines, it would be a result of investors piling into the longer end of the curve in search of yield. But investors aren’t that dumb - are they?
On the point above, I'm not sure that's the only explanation. As Americans (and particularly its wealthy boomers) age (and live longer than ever), advisors are reducing their equity exposure and weighting their portfolios more towards bonds.
There's a structural reason for bond flows.