Top Stories
Top Stories
Commentary

Ron Insana: This time is not different for the inverted yield curve

Key Points
  • Global interest rates are negative because the world economy is heading toward a synchronized recession.
  • Transportation, banking and small-cap stocks, the last of which are thought to be immune to global economic weakness, are all flashing warning signs of an impending domestic economic slowdown.
  • President Trump's trade war has ground global manufacturing to a halt.

The incessant drumbeat that the yield curve inversion is a false sign of recession is pushing me to do something almost impossible — tear my hair out.

I am growing increasingly concerned about the consistent, and persistent, lack of concern about the inversion of the yield curve among professional economists, some decisionmakers at the Federal Reserve and financial pundits. They claim that this inversion is different than those of prior vintage.

VIDEO3:5503:55
Monday's first trade

Since 1955, or 1967, depending on whose studies you quote, a domestic recession has been preceded by an inversion of the yield curve (where interest rates on long-term bonds are lower than short-term rates) 100% of the time.

As my colleague Michael Santoli noted Wednesday morning, the last time the curve inverted, prior to the 2008 financial crisis, even the Fed explained it away by claiming that a "global savings glut" was pushing excess cash into U.S. Treasury bonds, driving down yields and offering an unreliable indicator of impending recession.

Sadly, such was not the case.

Nor is it likely to be today.

The inversion of the Treasury bond yield curve during 2019.
Crystal Mercedes

The current and contrary argument suggests that negative yielding sovereign debt, totaling roughly $17 trillion, is forcing investors to stretch for positive yields, forcing them into Treasurys and sending a false signal about an impending recession.

Others suggest that mechanical and technical buying by pensions and other large savings pools that are derisking their portfolios is behind the surge of cash into U.S. bonds, rendering the predictive powers of the yield curve moot.

It's also true that plunging interest rates may well be forcing residential mortgage-backed securities holders to buy Treasury bonds as mortgage refinancings accelerate.

In these cases, MBS holders are seeing their mortgages get paid off early, leaving them with a difficult decision … buy more mortgages with still lower yields as prepayments continue to accelerate, or move money into Treasurys until mortgage rates become attractive.

They have, of late, chosen to buy bonds, speeding up the drop in Treasury yields.

Still, all these factors do not affect the predictive power of the yield curve's current inversion. Investors are rushing into bonds because of a confluence of negative events.

Global interest rates are negative because the world economy is heading toward a synchronized recession. Nine major economies are near, or already in, a contraction, including Germany, Europe's economic engine. China, of course, is slowing appreciably.

President Donald Trump's trade war has ground global manufacturing to a halt while stunting export and import activity from Beijing to Baltimore.

Other risks, as reported Wednesday morning, are the increasing likelihood that the U.K. crashes out of the European Union with a "no deal Brexit."

Britain's Prime Minister, Boris Johnson, has reportedly asked Queen Elizabeth to suspend Parliament so that he can ram through the exit with no legislative opposition. That would likely wreak further havoc on the British and EU economies.

The crash in Argentina's markets has not been helpful to emerging markets, nor has all the mounting political, and geopolitical risks that have been building in Venezuela, Iran, North Korea and between South Korea and Japan.

In addition, there are other reliable market-based indicators of an impending slowdown, abroad and at home. Metals prices, used in basic industry, have fallen on hard times.

Transportation, banking and small-cap stocks, the last of which are thought to be immune to global economic weakness, are all flashing warning signs of an impending domestic economic slowdown.

The Dow and S&P 500, down about 6% from their most recent highs, are not flashing such signals but have also been lagging indicators, relative to bond market signals, prior to recent recessions.

Rationalize all you want, but this time is not different. Anyone who says so has some stocks they'd like to sell you.