Does the Flattening Yield Curve Indicate a Recession? Steven Wagner Answers in U.S. News and World Report
The yield curve has been making headlines and it has many investors asking, “What is a flattening yield curve?” In a recent U.S. News & World Report article, Omnia CEO Steven Wagner described it as “your cue to think about whether you should dial back portfolio risk.” In the article, Wagner provides further detail and explains what a flattening yield curve means for investors.
In normal markets, yields for longer-duration bonds are higher than shorter-duration securities. When short- and long-term yields are closer together, as in the case now with the spread between the yield on the two-year and 10-year U.S. Treasury notes at about 57 basis points, it’s known as a flattening yield curve, the publication explains. If the yields for different durations narrow to such an extent that the yield curve inverts – meaning short-term yields are greater than long-term yields – a recession is highly likely. In fact, an inverted yield curve preceded the last seven U.S. recessions, says Wagner.
Narrow yields between the two-year and 10-year U.S. Treasury notes doesn’t mean the spread will invert. Current economic and monetary conditions may prevent an inverted yield curve, at least for 2018. Wagner says it’s not unusual for the yield curve to flatten late in an economic cycle, which is where he believes we are, especially as stock prices soar. “We haven’t had a recession since 2009, so we’re eight years into a fairly elongated cycle,” he says.
Wagner says his firm is closely watching the yield curve, and investors should use this time to review their asset allocations particularly in relation to risk. Omnia is already limiting its clients’ equity exposure. “We do want to trim back as we see the yield curve decline, and as equities go up, we will trim back more,” he says.
“Don’t try and use this as a way to plant positions,” Wagner warns. The period between when the yield curve inverts and a recession begins can be as little as nine months to as much as two years. The yield curve, he says, is really your cue to start thinking about risk and if you should dial it back.
Important Disclosures: Important Disclosures: Omnia Family Wealth, LLC (“Omnia”), a multi-family office, is a registered investment advisor with the SEC. This commentary is provided for informational purposes only. No portion of any statement included herein is to be construed as a solicitation to the rendering of personalized investment advice through this communication. Consult with an accountant or attorney regarding individual tax or legal advice.