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What we do know is this is the first time since 2007 that we have had an inverted yield curve. We also remember that 2008 followed and that wasn't good at all.

Another Milepost

April 4th, 2019 by Kurt L. Smith
  • Last month we talked inflation (there is almost none), unemployment (almost none of that either) and yields on treasury securities (very little, or let’s just call it historically low). The Fed has nothing to do except patiently wait. Last month something happened; the treasury yield curve inverted for the first time since 2007. Egads!

    Simply, the yield curve is called inverted when short-term rates are higher than long-term rates. This is usually not the natural order of things as investors usually prefer to be paid more yield to invest longer because something usually does happen later and it might not be good. Older people usually explain the difference using words like inflation (again, see last month’s letter).

    I could write an unlimited number of narratives as to why the yield curve is inverted and anyone could write one regarding what it portends. Traditionally an inverted yield curve portends lower growth prospects, according to the Federal Reserve, so it made sense for them to lower their 2019 forecast to 2.1% from 2.3%. Or maybe one has nothing to do with the other.

    What we do know is this is the first time since 2007 that we have had an inverted yield curve. We also remember that 2008 followed and that wasn’t good at all. According to Fed data, the inverted yield curve began in late 2006 and existed for about a year (Cleveland Fed data, “The Yield Curve,” October 2007).

    Lower growth is not necessarily no growth or even a recession, but the Great Recession followed the last time we had an inverted yield curve. I’m not going  to research how many economists, pundits or such were looking for a recession in 2006 or 2007, but I would say not many. Even fewer, or none, had the recession as Great.

    I do know I was a seller of long bonds and stocks in 2006-2007. Many of my long time clients may remember the call. I remember because some of you were hard headed about it. So hard headed that I decided moving back into long-bonds in 2009, for a trade, might not be worthwhile because some of you do not trade. I’d rather own our worthwhile bonds for as long as we can, than buying generic long-bonds from (usually) over-leveraged entities.

    Today I am a seller of bonds and stocks, so the inverted yield curve was not a signal, but rather a milepost on the journey to lower asset prices. You know me to be a seller of stocks since November 2017. You may not have acted immediately, but hopefully I am wearing you down. I say hopefully because I believe I offer you a way to keep the money you receive by selling. I see this as a much better alternative to not selling your stocks or your long bonds.

    It has taken over ten years to get to the inverted yield curve milepost. Time almost seems to be standing still. The Fed is waiting, patiently. But things will speed up. Be ready.

    Klein Independent School District, Texas Refunding GO

    Moody’s: Aaa (Aa1 Under)   S&P: AAA (AA Under)

    Permanent School Fund Guaranteed

    Due 2/1 Dated 5/1/19    Maturity: 2/1/2049

    Sale Amount: $77,965,000

    YEAR       MATURITY         COUPON          YTM*

    1               2020                     5.00%              1.52% 

    2               2021                     5.00%               1.53%

    3               2022                     5.00%              1.56%

    4               2023                     5.00%               1.62%

    5               2024                     5.00%               1.67%

    6               2025                     5.00%               1.75%

    7               2026                     5.00%               1.85%

    8               2027                     5.00%               1.90%

    9               2028                     5.00%               2.00%

    10             2029                5.00%               2.07%

    11             2030**                 5.00%               2.18%

    12             2031**                 5.00%               2.28%

    13 2032** 5.00% 2.35%

    14             2033**                 5.00%               2.41%

    15             2034**                 5.00%               2.45%

    16             2035**                 5.00%             2.50%

    17             2036**                 5.00%              2.55%

    18             2037**                 5.00%               2.60%

    19             2038**                 5.00%               2.64%

    20             2039**                 5.00%             2.68%

    21 2040** 5.00% 2.72%

    22 2041** 5.00% 2.75%

    23 2042** 5.00% 2.77%

    24 2043** 5.00% 2.79%

    25 2044** 3.25% 3.25%

    26 2045** 3.25% 3.28%

    27 2046** 3.25% 3.30%

    28 2047** 3.25% 3.31%

    29 2048** 3.25% 3.32%

    30 2049** 3.25% 3.33%

    *Yield to Worst (Call or Maturity) **Par Call: 2/1/2029

    Source: Bloomberg

    This is an example of a new issue priced the week of 4/2/19

    Prices, yields and availability subject to change


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