From Forbes: quote:
An inversion is considered an indication of risk in the bond market, and have preceded recessions in 11 out of 11 of the past recessions, with 2 ‘soft landings’ in the last 70 years.
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We had a prior inversion in early 2019, the Fed reacted with rate cuts, possibly averting or delaying a recession.
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In the past, the inversions tended to precede recessions by 12-18 months. It might be noted that in most prior inversions, we had a ‘double tap’, where the yield curve inverted two or three times before the recession.
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A question we should be asking ourselves is whether the inversion is caused by the risk perceived by the markets regarding coronavirus (Covid-19), the inherent risks of a pending recession, or both? Our view is that we don’t know, but it pays to err on the side of caution. When you’re coming down with something, it’s smart to take care of yourself. Prepare for a prospective downturn and be pleasantly surprised if it doesn’t happen.