John R. Mousseau quoted in this excerpt below...
Why You Should – or Should Not – Care About the Yield Curve
The disparity among different bond yields is often a predictor of recessions.
By Tim Smart - April 4, 2022
There’s plenty for investors and observers of the U.S. economy to worry about these days: inflation spiking at the highest pace in 40 years, a land war on the continent of Europe, an aggressive Federal Reserve hiking interest rates and political deadlock in Washington.
And then there’s the yield curve.
The curve is actually a line that measures the yield of various durations of bonds.
But last week, the 2-year had a yield higher than that of the 10-year. That means the yield curve was inverted.
Why Does This Matter?
Inverted yield curves reflect uncertainty about the future course of the economy and often serve as a warning sign of a coming recession, but not always.
Did the Fed’s actions create a distortion in the bond market?
John Mousseau, president, CEO and director of fixed income at Cumberland Advisors, notes that before the coronavirus arrived in the U.S. the 10-year Treasury yield was 1.9%. Then, it reached a low of 0.5% in August 2020 as the economy struggled.
“So, when compared to (the 1.9%), a 60-basis-point rise in rates seems more reasonable, particularly given that inflation has risen (though we also think we will see some retreat in inflation later in the year),” Mousseau added.
He also points out that market rates were already on the rise before the Fed moved in March, undercutting the notion that the recent uneasiness in the bond market is all a reaction to the central bank’s actions.
“We don’t think this is as much the market front-running the Federal Reserve as it is a reversion to the mean after COVID,” Mousseau added.
Read the full article at U.S. News & World Report: https://www.usnews.com/news/economy/articles/2022-04-04/why-you-should-or-should-not-care-about-the-yield-curve
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