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There’s a lot of claptrap that comes out of the mouths of Wall Street strategists. Ditto for Washington bureaucrats and two-handed economists.
But money talks — and that’s why I find it so important to follow what the Treasury “yield curve” is doing. I started talking about this incredibly important concept last week. Now I want to flesh it out a bit further to help make you a better investor!
Don’t let the jargon put you off. The yield curve is simply the line you get on a chart when you plot the yields offered on various bonds with different maturity dates. Here is what the U.S. Treasury curve looked like as of yesterday:
You can see that 3-month Treasury bills yield next to nothing — about 0.005 percent. Two-year Treasury Notes yield about 0.45 percent, while 10-year Treasury Notes yield 2.79 percent.
So what’s the significance here? What does this yield curve “mean” for investors like you?
Well, I’ve studied more than five decades of interest rate history. I’ve followed the market very closely for at least two. And what I see with great consistency is three phases in the yield curve with each major interest-rate cycle.
Phase I is when you have a rising or steep yield curve. Phase II is when you have a flattening yield curve. And Phase III is when you get an inverted yield curve — with short-term rates rising higher than long-term rates.
A rising yield curve is usually what you see in the early stages of an economic expansion — and it’s generally bullish for stocks. It’s a good time to buy.
Then as the curve starts to flatten, it’s still relatively bullish for stocks because it’s largely reflecting economic growth. But you do have to be more selective.
Finally, when the curve inverts, it’s a sign you don’t have much time left. You need to start worrying about recession, falling earnings, and the risk of declining — or even plunging — stocks! Time to start exiting the market.
So if you look at the difference in yields between 10-year and 2-year Treasuries (a standard measure of the curve) from earlier in this column, what do you see? You see that it’s running at POSITIVE 234 basis points, or 2.34 percentage points (That is, 10s are yielding 234 more basis points than 2s.)
We were as high as 289 basis points back in November 2010. So we’re off our peak for this cycle. But we’re also far, far above the kinds of readings we saw before the dot-com bust and housing crash. That means the “big money” in the interest rate markets is NOT betting on an impending recession.
It’s also why I remain fairly constructive on many stock investments. As I see it, we’re only in Phase II of the interest rate cycle, not Phase III, where bad things really start to happen.
Want to know more about interest rate cycles — what they are telling us now, what they’ve done in the past, and where we may be headed next? Good! You’re on the road to being a much better investor then.
To help you out, I’ve made module one of my landmark educational course “How to Profit from Changing Interest Rates” free to view. Just click here now or give my team of customer service professionals a call at 1-800-291-8545 to get up and running.
Until next time,
Mike
Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for Bankrate.com. There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money Report. He is often quoted by the Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.
