Welcome to “The Week Ahead” where we take a moment to provide our thoughts on what we can expect in markets and the economy during the upcoming week.

One of the most watched economic signals is the Treasury yield curve. The yield curve is the amount that the U.S. Treasury pays for bonds across various maturities. Most of the time the curve is upward sloping as investors demand compensation for the risk of owning bonds with longer maturity dates. While the coupon rate is guaranteed, the longer the bond, the more negatively impacted its price will be to rising interest rates.

Two weeks ago we saw the yield curve invert, meaning the 10-year Treasury was yielding less than the 3-month yield. This has traditionally been one of the more accurate indicators of a sharp economic slowdown. Indeed, inverted yield curves have preceded the last seven recessions. However, this is not an exact science. Inverted yield curves have sent false signals in the past.  And, this inversion, which ended last week, was extremely shallow and short-lived. The yield curve was inverted for just six days, and by only few basis points (0.03% to be exact). We would need to see the inversion last at least three months for this indicator to be historically significant. Another important consideration is that, on average, it takes 17 months from the initial inversion for a recession to begin, and it is often preceded by a strong equity market rally:

Avoiding risk by locking in the certainty that comes with buying a 10-year Treasury is just one of the reasons an investor may prefer a longer dated bond. Another reason U.S. yields remain at historic lows is due to strong demand from global investors. Incredibly, there is now $10 trillion of negative yielding debt around the globe. German 10-year bond yields hover around zero percent, and recently got as low as negative 0.08%. To a foreign investor, 2.5% backed by the strongest economy in the world can seem very attractive. The reason more foreign investors don’t buy more U.S. debt is due to expensive currency hedging costs.

While the gap between short and long-term yields remains slender, economic growth is still relatively good and the stock market tends to perform well for years after the initial inversion. Additionally, with credit markets holding up well, the employment market at its strongest in fifty years, and wages still increasing, we don’t yet see the necessary combination of factors that suggest a recession in the foreseeable future.

~“In investing, what is comfortable is rarely profitable.” –Robert Arnott

Data deck for April 8-April 12: