Hazelle
in Memos & Musings · 3 min read
About a week ago, I shared in one of my live sharing sessions on Zoom on the inversion of the yield curves. Here are the main points I talked about.
I shared that the spread between the 10Y and 2Y treasury yield was one of the indicators I was looking at. It has proven to be a rather good indicator for a possible recession as it had previously predicted the past recessions. How it works is that historically, economic recessions occur when the spread between the 10-year yield and the 2-year yield drops below zero.
The reason why a negative spread is undesirable is because the yield for a longer time period should generally be higher than the yield of a shorter time period to compensate taking up higher risks for the longer holding period. Hence generally under normal economic conditions, the 10Y yield minus off the 2Y yield should generally be positive.
The spread has dipped below zero briefly, is a recession coming?
Understand that the 10Y-2Y Spread on Treasury Yield is a leading indicator. That means even if today the spread drops below zero, recession does not have to happen immediately. It may take some time before a recession happens based on how it has played out for the previous recessions.
Closing thoughts
Regardless of whether a recession is imminent, our role as an investor is to learn how to navigate the markets based on what Mr Markets throw to us. It is perhaps more worthwhile to spend our time learning strategies to manage our investments under various kind of market conditions than to spend time panicking about a recession.
About Hazelle
Chief trainer of The Moneyball Investors Playbook program and founder of The Joyful Investors, a financial education firm that seeks to help avid investors learn to invest better and make the journey a joyful one. I graduated with a first class honors in Bachelor of Accountancy from Nanyang Technological University (NTU) and started my auditing career in one of the Big Four. I believe that once we know how to build our wealth sustainably, we can then live our best lives ever.
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