Scary Move Points To Recession

All signs point to an imminent recession. While it is unlikely to reach the levels we saw during the 2008 financial crisis, the average investor will still be hard hit.

- Maarten Mittner

It was quite a scary financial chart that spooked financial markets at the end of March – even more disconcerting than the usual charts depicting a retreating rand against the dollar or the slide in the property index on the JSE. The chart depicted the “inverted” yield of the three-month US Treasury compared to the benchmark ten-year, meaning that the yield in the three-month rose above that of the ten-year.

This phenomenon flies against all known money theory and financial knowledge about the market.

Yields on longer-dated treasuries are usually higher than short-term treasuries due to the inherent risk over the longer term, for which investors need to pay a higher yield premium. When the ten-year yield fell to 2.4% and the three-month rose to 2.5%, it meant that investors saw less risk over the longer term than over the short term. Therefore, negative short-term conditions necessitated selling for more safe-haven comfort over the longer term.

This is a very unusual and negative development.

A recession has always followed the selling of short-term bonds in favour of long-term investments in an inverted manner. The most recent being in 2006, before the Great Recession of 2008. It’s not simply a quirky happening. It is real, and based on economic realities where money is getting tighter due to interest rate increases already implemented. With inflation set to fall over the longer term, it justifies buying longer-term bonds at the expense of short-term instruments.