Uninvert – to restore from an inverted state; to turn the right way round again
Truth be told, we are not certain “uninvert” is even a word. A Google search for uninvert led us to the website Wiktionary and the definition in our headline above, while a search on the Merriam-Webster website informed us uninvert was not to be found in the world’s most famous dictionary. Either way, we are embracing “to restore from an inverted state; to turn the right way round again” and focusing on how uninvert relates to the recent behavior of the US yield curve and, on that front, we’ve gotten the word and it’s good!
If there is one issue – other than US/China relations – that has preoccupied Wall Street this year it is the US yield curve; more specifically, whether the shape of the curve was signaling that a recession was imminent. To back up, the curve is the plotting of yields on offer from US bills, notes, and bonds. Most of the time, the curve is positively sloped, meaning yields on shorter-term debt instruments (such as bills) are below yields on longer-term debt instruments (such as notes and bonds). However, every once in a while, yields on shorter-term instruments equal yields on longer-term instruments (when that happens the curve is said to be flat) or exceed yields on longer-term instruments (when that happens the curve is said to be inverted).
Wall Street obsesses over the shape of the curve as it has inverted prior to every US recession of the past 50+ years, and the two most watched parts of the curve inverted earlier this year (the 10- year/3-month part of the curve beginning in May and the 10-year/2-year part of the curve briefly in August). We always believed that the inversion of the 10-year/3-month curve was driven by too tight US monetary conditions and that the inversion of the 10-year/2-year curve was driven by concern the US/China trade dust up would cause a global recession. We also believed if the Federal Reserve (Fed) became more accommodative and we saw progress on the trade front, we could avoid recession and the stock market would be biased higher. Well, the Fed has cut rates three times and the US/China discourse has improved meaningfully, and we have gotten both a steepening of the curve (the 10-year/3-month curve and 10-year/2-year curve have “uninverted,” with the 10-year yield about 20 basis points higher than the 3-month yield and 2-year yield, respectively) and the stock market hitting an all-time high. We believe the steepening US yield curve is reflecting investor optimism about increasing global growth into 2020 and, for now, we believe that optimism is well placed.
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.
Tagged: market perspectives, Tim Holland, US/China, yield curve, Federal Reserve