Good afternoon and welcome to this week’s News, Views and Truths! The sun is shining and the country is still in one piece… just. But let’s not let that get in the way of a great weekend, shall we?
Despite thoughts to the contrary, the continuing omnishambles that is Brexit is not having much of an effect on investment markets; how long that will be the case, no one truly knows. Although I continue to be certain that once a resolution is reached, we will see heightened interest in the UK market which can only be positive for investors.
However, further to last week’s blog on the US Federal Reserve and their announcement that their trajectory will be more accommodative than first believed, there has been a reaction. Possibly a very, very major reaction.
This week saw the beginnings of an inversion in the US yield curve. The yield curve is a plot of the interest rate payable by a government on debt issued; the longer the date to maturity, the higher the interest rate offered to compensate investors for tying up their money for longer – think of it like the interest on offer from a fixed term deposit savings rate. Or indeed mortgage rate.
An inverted yield curve occurs when shorter date bonds offer a higher yield than longer dated bonds of the same quality. So, what’s the big deal?
Historically, inversions of the yield curve have preceded many recessions. Due to this historical correlation, the yield curve is often seen as an accurate forecast of the turning points of the business cycle. That’s why it’s a big deal.
However, what many commentators are missing out on is that the inversion is only on the very, very short term at this moment in time – 3 months and 6 months debt specifically. This is directly due to the effect that the Federal Reserve’s speech last week has had on this end of the market. The Fed directly influences the very short end, less so the later maturities. And it’s the 2-year rate we need to watch.
The chart below shows that we are close to that and it has been a very good indicator of recession. But in terms of how long this will be, that’s up for debate.
And I still firmly believe that 2019 is panning out to be another very good year for equity investors. However, this is what is taking up my time at the moment and be assured that all Three Counties clients will benefit from the research that myself and my team undertake when managing our clients’ investments. We do the worrying for you!
Have a great weekend and I will see you next week.