I did a post on the US treasury yield curve back in May 2016 (read here). As quoted in that post (with reference to a newspaper article): A sign that a correction is coming is that the US treasury yield curve is close to as flat as what you see before previous crises.
- US Treasury yield curve flattens to lowest level since financial crash (read here)
- The 10-year Treasury yield has hit the 3% level — here’s what that means (read here)
- 2-year Treasury yield posts largest weekly climb in three weeks (read here)
“A flattening yield curve is traditionally a harbinger of a recession to come, suggesting little inflationary expectations because of slowing economic activity. Why buy 10-year when you get nearly as much return from shorter dates,” Blain told CNBC via email. (Extract from 2nd article above)
The yield spread between the 2-year and the 10-year rate stood at 43 basis points, around its narrowest in about a decade. (Extract from 3rd article above)
I think every day, is a day closer to the next big crash. Although we never ever really know when.
So how is the yield curve now in comparison to the one in May 2016? See below.
From the above, we can see that the yield curve is flatter now as compared to the one in May 2016. That is not surprising.
But what if we compare the yield curve to the one prior to the 2007 Great Financial Crisis? Eg. The curve in Oct 2007? See below.
Surprising, the yield curve now is similar or even flatter than the yield curve in Oct 2007. Hmmm….
Basically, in my case, I still have a significant portion of my portfolio in risky stocks which aren’t really showing much profit so to speak. However, if I compare my liquid cash (war-chest) to stocks, the proportion is a low 35% vs 65%.
There are many many shares which I would have liked to purchase but have held back. Actually, it is never an easy task. (esp. when I think about the cash sitting there and doing essentially nothing)
I don’t believe in timing the market, and have always stay invested (even now). This year wasn’t a profitable year for my stock portfolio.
Nevertheless, one must always be prepared mentally and to allocate sufficient war-chest for the occurrence of a crash. As much as I would like to paint a rosy picture and say that a Crash would never come… but it will. Not if but when.
Whether you are already invested in the stocks you believe in or have been aiming for some stocks….
“People who succeed in the stock market also accept periodic losses, setbacks, and unexpected occurrences. Calamitous drops do not scare them out of the game.”
― Peter Lynch
Flattening or flat yield curve doesn’t mean recession is near.
What you’re looking for is 2-10 inversion. Once that happens there’s usually another 12-18 months to the top in markets.
E.g. For GFC, inversion occurred in Feb 2006 but top only occurred in Oct 07. And official recession only started in Dec 07.
Thanks. Diyquant did a good post on that.
However, we can never ever really time a crash.
Thanks for the link. I’ve seen similar analyses done by US people many years ago, but focused on the 2-10 spread which is the more conventional metric. The 2-10 gives more of a lead time warning compared to 1-10.
You are welcome.