Charles Dickens

“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to heaven, we were all going direct the other way – in short, the period was so far like the present period, that some of its noisiest authorities insisted on its being received, for good or for evil, in the superlative degree of comparison only.”

– A Tale of Two Cities, Charles Dickens

While Charles Dickens had revolutionary-era France in mind when penning his literary classic, A Tale Of Two Cities, his prose could easily apply to the US yield curve and what it might – or might not – be telling us about our economy today.

The yield curve is a plotting of yields associated with US Government debt (bills, notes and bonds). Usually, debt of a shorter maturity offers a yield lower than debt of a longer maturity since the risks associated with loaning money to our government increase as maturity lengthens. When shorter maturity debt offers lower yields than longer maturity debt, the yield curve is said to be positively sloped.

When shorter maturity debt offers a yield equal to longer maturity debt, it is said to be flat. And when shorter maturity debt offers a greater yield than longer maturity debt, the curve is said to be inverted. Wall Street pays attention to the shape as an inverted curve has historically preceded an economic downturn. This brings us back to our friend, Mr. Dickens.

Parts of the curve have inverted, particularly the US 3-month/10-year section, leading many to conclude a recession is imminent. However, the US 2-year/10-year section – historically the most influential part – has not only not inverted, it has become more positively sloped (albeit off a very low, near flat level), leading many to conclude the US economy, while maybe slowing, is not at risk of a recession (see above right). Given these contrasting signals, what is an investor to think?

Brinker Capital believes the slight inversion of the US 3-month/10-year curve isn’t a signal of pending recession, but instead a signal that credit conditions are too tight and that the US Federal Reserve should loosen monetary policy in the back half of 2019. We also believe that if we can solve for US/China trade and the Fed does become more accommodative – and we expect both will come to pass – the US economy will continue to expand into 2020.

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Brinker Capital, Inc., a registered investment advisor.

Chart source: Brinker Capital

Tagged: Tim Holland, market perspectives, S&P 500 Index, yield, bonds, weekly wire