Explainer: Several parts of the U.S. yield curve are inverted: what does it tell us?

Sven

Yields on two-year Treasuries have been significantly above those of 10-year Treasuries since early July. Other parts of the curve that the Fed sees as more reliable warnings an economic contraction is expected have also inverted, or have flattened significantly, in recent weeks.

https://reuters.com/markets/us/several-parts-us-yield-curve-are-inverted-what-does-it-tell-us-2022-11-01/

If recession scenario plays out in early 2023, how would you position your portfolio and what asset classes would survive ?

Crash

I have attempted to construct a portfolio with both funds and single stocks which will withstand a recession without making me lose sleep. I remember '08-'09 vividly. I was still pouring $$$ into my 403b (self-directed!) through that hot mess. But it wasn't in stocks, it was in EM bonds. NO MORE of that. The time was right for it back then.

I've no doubt there will be a recession. I'm going to continue to grow my portfolio, not pull back. I'm too heavy in Financials and will reduce that sector in the portfolio after the New Year. But that would have been true, no matter what. PRISX. (corrected.)

Half of my bonds are in Junk. Total in bonds is 25%. My priority is on the divs, not share price. TUHYX. The other half is in balanced funds: PRWCX and BRUFX.

If losses are inevitable in a recession, I'm prepared. Particularly after the GFC and... THIS year has smelled a lot like old garbage, too, but with a few respites.

Favorites, (in addition to PRWCX, of course:) BHB ET PRFDX .

sma3

@sven

It depends on your views of inflation. At 70, while I was not investing at the time, I am old enough to remember "Stagflation" in the late 70's and 80's. My wife and I thought we had it made in "Dreyfus Liquid Assets fund" that paid 14% (?). We didn't realize Treasuries paid 15% and if we had bought them we could have held them for 30 years.

Anyway, if you think this will be an ordinary recession/ deflationary scenario then buy long term bonds.

IF you think inflation is currently being driven by many external factors (ie war, Russia, etc) and the Fed will be unable to control it, would stay in short term bonds and cash and even in oil and commodities.

Personally, I am still largely in cash and short term bonds, but buying some ten year Munis and Treasuries in case interest rates do drop.

I am overweight in Energy and Commodities especially agriculture ( DBA and MOO ). Longer term I expect rare minerals and stuff used in electric vehicles and clean energy will do very well. Most of these stocks have crashed along with all the other high PE stuff, but they may bounce back quicker than AMZN, MSFT and of META

yogibearbull

Interesting that Powell mentioned that the Fed prefers to watch 3mo-18mo yield spread. That is a nonstandard spread vs those used in media (3m-10y, 2y-10y, etc).

Sven

@yogibb, the 10 Year-3 Month Treasury Yield Spread is the difference between the 10 year treasury rate and the 3 month treasury rate. This spread is widely used as a gauge to study the yield curve. A 10 year-3 month treasury spread that approaches 0 signifies a "flattening" yield curve. Furthermore, a negative 10 year-3 month spread has historically been viewed as a precursor or predictor of a recessionary period. The New York Fed uses the rate in a model to predict recessions 2 to 6 quarters ahead.

10 Year-3 Month Treasury Yield Spread is at -0.16%, compared to -0.12% the previous market day and 1.53% last year. This is lower than the long term average of 1.20%.
https://ycharts.com/indicators/10_year_3_month_treasury_spread

The indicator went negative in late October. Think it is too early to say anything.



@sma3, we are living in strange time when many events are coming together (war, pandemic and remote working) and they all contribute in their own way to inflation. The challenge is that it doesn’t seem to respond well to rate hikes.

I maintain a balanced allocation while paying particular attention to risk reduction. Sold most of growth stocks, EM and developed market stocks. Still I keep a healthy cash position (CDs and treasuries), and exposure to energy, and commodity futures. Just as I am building up alternatives they are falling.