Unless you live in an underground bunker, you probably heard that the U.S. Treasury yield curve inverted on Wednesday. The news was enough to send the stock market into a swan dive with the Dow closing 800 points lower.
The 10-year yield dipped below the two-year yield on Wednesday, which is what triggered the hysterics. But the three-month yield has been higher than the 10-year yield for a large stretch of this year.
Let’s talk about what all of this means… and what it doesn’t mean.
The Inverted Yield Curve
Every recession since the 1950s has been preceded by a yield curve inversion with only one “false positive,” or a situation where the yield curve inverted and there was no recession that followed.
That’s a true statement, and it sounds scary. But keep in mind, we’re talking about nine data points. That’s not really enough data to draw meaningful conclusions.
Furthermore, the lag between the yield curve inversion and the start of a recession can be as long as two years. Two years can be an eternity in the financial markets.
Now, I should be clear that I do expect a recession in the not-too-distant future, or at least a noticeable slowing of growth. To be a technical recession you have to have two consecutive quarters where the economy shrinks.
It’s possible that instead we just get a quarter or two of really flattish growth. But that’s just splitting hairs and doesn’t really matter. The point is that I expect slower growth ahead regardless of what the yield curve does.
Take a look at the longer end of the yield curve.
The 30-year yield recently hit a new all-time low just above 2%. As in, even lower than during the 2008 meltdown and its aftermath.
Inversion or no inversion, the longer-dated end of the bond market is sending a very clear message that it sees little growth and essentially no inflation ahead.
Meanwhile, bond yields in most of the developed world are actually in negative territory, and former Fed Chairman Alan Greenspan says he sees “no barrier” to negative Treasury yields here.
Capping it off, the U.S. labor market is at full employment, meaning that the easiest route to growth — hiring more people to produce more stuff — is a lot tougher than it used it be.
Does Any Of That Sound Like Rosy Days Ahead?
We may get an outright recession… or we may not.
Either way, it’s hard to see a scenario where we get robust growth ahead. And so as long as growth is muted, we should expect bond yields to stay low.
But if you’re looking for income, don’t fret. There’s still plenty of places to earn a respectable yield outside of the traditional bond market. That’s exactly what I cover in Peak Income.
Just this past month, I added a fund with a yield of 22%.
Not all of my picks sport yields quite that high. Most fall into a range of 7% to 10%. But in a world where negative interest rates are starting to become normal, 7% to 10% looks fantastic.
Yields like these can turn your 401(k) into what I call a “1201(k).” And yesterday I shared how to triple the average retirement yield using the 1201(k) plan.
So, click here to learn how you could grow your nest egg with the additional income earned.