Cautionary Signs or False Signals?
The 30-year Treasury bond recently yielded just over 2%, an all-time low. Think about it: investing one’s money for three decades for a negative return after taxes and inflation are factored in. Usually long-term Treasuries perform well during periods of economic uncertainty, especially at the onset of a recession. That’s the initial message investors perceive from this low bond yield.
Another cautionary sign is that the Treasury yield curve is partially “inverted.” A “normal” yield curve is upwardly-sloping, meaning that investors demand a higher yield in exchange for taking on the risks of investing over a longer period of time. The 30-year Treasury typically yields more than the 10-year, and the 10-year more than the 2-year or a 90-day Treasury bill. An inverted yield curve occurs when the opposite is true, that short-term Treasuries pay better than long ones. This is rational only when the outlook is for lower interest rates as long-dated bonds will appreciate more than shorter bonds when interest rates fall. Recently, shorter maturities like the 2-year and 5-year Treasury and the 90-day bill yielded more than a 10-year Treasury. The 30-year bond still yields about half a percentage point more, hence the term “partial inversion.”Read More