The Sky Isn’t Falling But Interest Rates Are. Here Are Suggestions On How To Respond

Highlights

  • Interest rates are falling faster than a drunken tight-rope walker.
  • There is considerable disagreement amongst market commentators and portfolio managers on how to respond.
  • There are various ways to lower your vulnerability to a bear market.

“The Sky is falling” is the catch phrase of Henny Penny (more commonly referred to as “Chicken Little” here in the U.S.), the lead character in a European folk tale of a chicken who goes on a quest to warn others that the world is coming to an end after getting hit in the head by an acorn. The moral of the story: Don’t believe everything you hear.

Last week, market procrastinators were issuing warnings that a recession is looming and the long-lasting bull market is coming to an end. The motivation for their proclamations is the inversion of the yield curve, which graphically depicts the interest-rate spread between short- and long-term bonds. 

More specifically, on August 14th the interest rate paid on 2-year bonds rose above that paid on 10-year bonds. The same condition has occurred prior to each of the last nine U.S. economic recessions, according to the San Francisco Federal Reserve Bank.

Nonetheless, as Jim Picerno, The Milwaukee Company’s Director of Analytics, explains here (and as we will be discussing in more detail in our Diversify and Conquer post tomorrow), in my view, an inverted yield curve should not be looked at as a prediction that a recession is forthcoming. To the contrary, it should be regarded as a signal that the likelihood of a recession is high, ifpolicymakers do not implement preventative measures in response.

One thing is sure: interest rates have been falling faster than a drunken tight-rope walker. At the end of trading on August 16th, the interest rate on a 30-year Treasury stood at just 1.98%, while the 10-year rate settled at 1.54%. Former Federal Reserve Chairman Alan Greenspan has gone on record saying that he won’t be surprised if U.S. bond yields turn negative. Things have gotten so wacky that a bank in Denmark is willing to pay borrowers to take out a mortgage (Sign me up!).

1 2 3
View single page >> |
How did you like this article? Let us know so we can better customize your reading experience. Users' ratings are only visible to themselves.

Comments

Leave a comment to automatically be entered into our contest to win a free Echo Show.