What caught my eye this week.
This week saw the all-important US yield curve ‘invert’. This happens when short-term rates in the bond market exceed longer-term rates – typically two-year bond yields versus 10-year yields.
Is this newsworthy? The Internet news-machine thinks so:
Confession time! I admit I haven’t read all 35,200,000 articles that Google tells me are available about ‘yield curve inverted’.
I’ve read maybe three. Perhaps that’s irresponsible, even if we presume 34 million of them were talking about some previous inversion of the yield curve.
Well that’s me: all rock-and-roll.
Or more precisely… like most active investors I’ve been force-fed developments in the interest rate market daily for at least six months now, like some goose being fattened for Christmas.
Thus the US yield curve finally inverting was about as surprising a development as British Summer Time. (Note: I mean the clocks going forward, not us actually getting a summer.)
Still, perhaps you have been doing better things with your time than reading about rates? Want to catch-up? Here’s a link to those search results. Have at them!
Or else just read this excellent article on the yield curve inversion from Morningstar.
Ahead of the curve
A couple of readers have asked me what I think about this portentous event. Which is flattering, but also like asking Richard Dawkins to tell you your horoscope.
This stuff is not really my bag. However in my defense that’s a strategic decision.
You see, I don’t really think the US yield curve inverting is signalling anything we don’t already know.
And nowadays I doubt it ever could.
I’m old enough to remember when – outside of investment banks, trading floors, and economics classes – the only people who ever mentioned yield curves inverting were weirdos on discussion forums who’d at some point presumably escaped from banks, trading houses, and classrooms.
In those quieter days, the yield curve inverting was maybe a useful tell.
But honestly, I now expect my mum to tell me about the yield curve inverting when I call her this Sunday. In-between her spring gardening plans.
In theory, the US yield curve inverting is worth watching for as historically it’s presaged recessions.
In theory, again, that’s because an inverted yield curve indicates the market expects interest rates to decline in the longish-term (ten years or so out) which is the sort of thing that happens in recessions. (Due to central banks cutting rates and also market forces, as there’s a bid for safer assets).
And having advance knowledge that a recession is coming is – again, in theory – useful for investors, because recessions are bad for at least some markets.
But.
Curves in all the right places
For starters, the yield curve has to be inverted for a while to matter. And even then it can give false positives.
But rather than listen to me waffle on about the empirical evidence, have a look at this summary from the Chicago Fed. It’s pretty compelling in arguing that yes, the yield curve inverting probably does indicate a coming recession, but no we don’t really know why.
(That’s not be confused with ‘people won’t tell you they know why it forecasts a recession’. People most certainly will. Even I just gave one reason above. People are always very ready with a Why.)
Let’s just agree for now that the yield curve inverting is indeed a strong indicator of a coming recession. Does this really tell us anything new about the US or even the global economy?
I mean compared to all the information we already have about central bank plans to raise interest rates, and the soaring inflation that is causing the cost of living to skyrocket around the world?
Oh, and energy supply problems and the war in Ukraine?
I think you might accuse the yield curve of rather gilding the lily.
We know the US central bank is aiming to raise rates at least half a dozen times. If the bond market hadn’t reacted to that by pushing up short-term rates then that really would be worrying.
We also know bad times eventually follow good times.
Personally I’ve felt recent US GDP growth was being ginned up by restocking and other artifacts of exiting lockdown, for instance, and thus that there would always be a cooling. (This was also why I expected inflation to have started to fall by now, albeit Russia has done for that).
A recession is just technically defined as two quarters of negative growth. It doesn’t need to mean dust bowls or Hollywood movies about Michael Burry shorting Wall Street.
The UK situation is murkier because of the impact of Brexit, but for what it’s worth our yield curve is flat rather than inverted, so far. But nobody watches the UK yield curve much.
Behind the curve
What investors – and our curious readers – really want to know is what does this mean for stock prices?
Indeed some pundits seem to take it as read that the yield curve inverting is predicting not a recession but a stock market crash.
However this is not the case. If anything, I think it’s a bit bullish.
First there’s data to suggest that. For example have a look at these tables showing that US stocks usually rise over most periods following a yield curve inverting.
It’s also logical, at least to me, that markets would rally in the wake of the yield curve inverting.
Why?
Because by the time the yield curve has inverted really everyone knows everything. Worries about interest rates have rumbled on for months. The yield curve flattening was kind of interesting in 2021, but now it has finally inverted is that dramatically more interesting?
It’s not irrelevant. But it’s the continuation of a trend, rather than a shocking bolt from the blue.
Shares often fall in advance of a recession – which is perhaps just what we’ve seen this time – and people have already noticed the economy has been having it ‘too good’, which is what we saw with all the euphoria in the US in 2021.
And if share prices are already lower, then they are already discounting bad news.
For example I was noting well before Christmas that there had been an almighty crash in high-flying growth stocks that was likely to spill into the wider market. A few readers scoffed that their trackers hadn’t moved more than a percentage point or two. Hence they weren’t bothered at all.
(Which, by the way, is totally fine. Having readers not being concerned about this stuff is an aim of this site! I’m the weirdo here.)
Anyway, as we all know the past three months did actually turn out to be quite a bit rougher. We saw technical corrections for many major stock markets and even a roughly three-second long bear market for the US Nasdaq tech index.
Shares have since recovered quite a bit, despite further bad news. And now the yield curve is inverting, to tell us what you really needed to know six months ago to do much useful with.
Remember, you need to buy the rumour and sell the news if you’re playing the active game. (Which, again, most people really shouldn’t).
Otherwise you’re playing the reacting game. Also known as the ‘sell low and buy high’ game. And that maths doesn’t work out so well.
To be clear I am not saying we’re definitely set for a stock market rally, or that it was obvious shares would wobble in early 2022.
I’m saying one can make vague probabilistic bets about such things, if that’s your wont.
But given that nobody really knows until everyone knows – because it’s happened, because a yield curve has inverted, say – then reacting to this stuff after the bets are in is a bit futile.
You’re better off sticking to your regular investing plan and leaving well alone.
Flattening the curve
Finally the other reason to be wary of acting on this particular yield curve inversion is that it probably reflects in-part some funny business regarding the US Federal Reserve.
I don’t mean anything nefarious. Rather that, as we all know, via quantitative easing and more recently quantitative tightening central banks have been manipulating the yield curve for years.
So it’s hard to compare today’s yield curve shenanigans with your grandma’s yield curves.
Can the US Fed and other central banks get out of the near-zero rate era and tame inflation without triggering an economic downturn?
The Economist has its doubts and so do I.
But I don’t think it means investors need fear a disastrous future, nor even change what we’re doing. At least not if you had a well-balanced portfolio to begin with.
Many companies have been posting mega-profits for the ages. They have the margins to cope with inflation, take a bit of pain, and balance sheets to get to the better times.
Bonds have finally faced a bit of a reckoning. But in the long-term lower bond prices mean better returns due to higher yields. You’ll also notice that so far this bond market crash doesn’t feel anything like the equity slumps of 2000 or 2008 or 2020. Equities are always the riskier asset.
Inflation is what really hurts the return from bonds. It hits the nominal return from shares, too, of course, but shares are expected to deliver higher returns than other assets over longer-term periods, which is why they have eventually outpaced inflation.
Shares don’t hedge against inflation, in my view, but rather they beat it. Subtle difference.
Maybe this time it’ll take a while for that to happen, or the recession will be worse than I expect, or some new awful thing will roll along and knock us and our portfolios for six. So stay diversified.
Concentrate on keeping an income coming in and stopping your outgoings getting out of control.
However I wouldn’t fret too much about the yield curve inverting. It is only telling us what we already almost certainly knew.
Have a great weekend!
From Monevator
How to spend money – Monevator
Social care costs: a case study – Monevator
From the archive-ator: What to give a newborn niece? – Monevator
News
Note: Some links are Google search results – in PC/desktop view you can click to read the piece without being a paid subscriber. Try privacy/incognito mode to avoid cookies. Consider subscribing if you read them a lot!1
Bleak Friday: websites of UK energy suppliers crash in meter-reading rush… – Guardian
…but it might not be too late to submit a reading to 31 March, depending – Guardian
UK house prices rising at fastest pace in 17 years says Nationwide – BBC
With $117bn, Warren Buffett is back among the world’s top five richest people – CNBC
National Grid criticised for £4.2bn sale ‘of the national silver’ to foreign investor – Sky
Barclays [opaque] structured notes blunder could cost £450m – IFR
Deliveroo boss’s £106m share award slumps to £33m in just a year – ThisIsMoney
Brexit blamed as UK misses out on global trade rebound [Search result] – FT
Products and services
Chase Bank adds new 1.5% savings account – Be Clever With Your Cash
Last chance for cashback – offer ends 5 April! Open an account with InvestEngine via our link and get £25 when you invest at least £100, plus another £25 – £500 cashback when you invest £1,000 or more in an ISA (new customers only, T&Cs apply) – InvestEngine
Is it cheaper to have a bath or a shower, and other energy consumption questions – Guardian
How to get a good deal when renewing your car insurance – Which
Open a SIPP with Interactive Investor and pay no SIPP fee for six months. Terms apply – Interactive Investor
Can insulating a home help landlords secure a cheaper ‘green’ mortgage? – ThisIsMoney
Tesco urges shoppers to buy Saharan-sandy veg – Guardian
What are the odds of beating inflation with Premium Bonds? [Spoiler: tiny] – Which
New Vehicle Excise Duty bands have risen with RPI inflation – ThisIsMoney
Homes with inspiring renovations, in pictures – Guardian
Comment and opinion
Freed by frugality: one way to financial independence – Humble Dollar
Our fire-fighting chancellor tinkers while inflation burns – David Smith
The strange and unsettled future of money [Podcast] – The New Bazaar
How salience bias influences the decisions that investors make – RIA Intel
I could kill my mortgage (if I wanted to) – 3652 days
Crypto vs gold: the search for an investment bolt hole [Search result] – FT
The future is unknowable: spend it all, or sock it away? – Physician on FIRE
Is buying a house cheaper than renting? – Halifax/Which
Has the FCA’s ‘Assessment of Value’ initiative achieved anything? – TEBI
Global stock markets have been more closely correlated in recent years – Morningstar
Read this before you prematurely leave your job – A Teachable Moment
Diversification from an esoteric factor-based portfolio [Nerdy] – Factor Research
Bond bear market mini-special
What does a bond bear market look like? – A Wealth of Common Sense
Why the 60/40 portfolio, when 40/60 is optimally risk-adjusted? – Cullen Roche
RIP sub-zero yielding bonds [Search result] – FT
Crypt o’ crypto
Climate activists urge Bitcoin to move to a proof-of-stake model… – Guardian
…while grassroots opposition to Bitcoin mining coalesces in the US – Protocol
Constructing a crypto index [Podcast] – Validea
How a top crypto VC makes contrarian investments – The Generalist
Naughty corner: active antics
The funny business of private market valuations – Doomberg
Bill Miller’s biggest loss – Novel Investor
Hedge fund launches went through the roof last year – Institutional Investor
Russian-Ukraine invasion
Russian public’s views harden, to the dismay of Russian expats – NBC
Covid corner reprise
US health regulator recommends fourth Covid shot for all over-50s… – CNBC
…even though 95% of US citizens have some Covid antibodies – CNBC
Where are we with nasal Covid vaccines? – PLOS
Rare Covid immunity may hold clues to defeating the virus – Bloomberg
Kindle book bargains
Who Moved My Cheese? by Dr Spencer Johnson – £0.99 on Kindle
The Art of Gathering: How We Meet and Why It Matters by Priya Parker – £0.99 on Kindle
Why the Germans Do it Better: Notes from a Grown-Up Country by John Kampfner – £1.99 on Kindle
Blitzscaling: The Lightning-Fast Path to Building Massively Valuable Companies by Reid Hoffman and Chris Yeh – £0.99 on Kindle
Environmental factors
Wasteful ghost flights running at 500 a day from UK – Guardian
How effective is green investment spending? – Klement on Investing
Religion may be a key reason for declining fertility – Uncharted Territories
Back to the office mini-special
Hybrid working v1.0 isn’t really… working – Slate
Shattered – Indeedably
The realities of the four-day work week – BBC
Bankers are revolting – New York Post
Off our beat
Deep roots – Morgan Housel
Puttering around: why small tasks feel so therapeutic – BBC
Review of Freedom to Think by Susie Alegre – Guardian
Lessons from 30 years of living – Joseph Wells
The cult of Adam Tooze [I’m looking at you, @TA 🙂 ] – NY Mag
29 lessons from running a bookstore – Ryan Holiday [h/t Abnormal Returns]
And finally…
“Getting your finances right is essential to 100-year life, but money is far from being the most important resource. Family, friendships, mental health and happiness are all crucial components.”
– Lynda Gratton, The 100-Year Life: Living and Working in an Age of Longevity
Like these links? Subscribe to get them every Friday! Note this article includes affiliate links, such as from Amazon and Interactive Investor. We may be compensated if you pursue these offers, but that will not affect the price you pay.
- Note some articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”. [↩]
I found the numerous articles and chatter regarding meter reading on the 31st infuriating – it made a great news story for Martin Lewis et al, but i’m convinced this will end us costing most people more.
We’ve just had several warm weeks to end March. Now we’re moving into a cold snap as April begins. So reading your meter on 31st March is just going to ensure you pay for a relatively low-use month at old, cheaper prices. If you do nothing, the averaging effect of energy companies estimated use is surely going to work in most peoples favour. What am i missing?
There was panic on social media and it all seemed quite unnecessary…
At some point this week, I think, the FT stopped showing historical prices for funds etc. Just a blank space shown now. e.g. https://markets.ft.com/data/funds/tearsheet/historical?s=GB00B3TYHH97:GBP
I’ve no idea if it’s a bug or “feature”. Anyone know? Or have suggestions for alternative sources for recent prices? They were the most comprehensive I’d come across.
Honestly, the yield curve has been inverted for months in forward space. It’s just that the spot curve requires actual rate hikes to invert. It’s a totally mechanical process.
Take a really simple example. Imagine a toy model yield curve that has only three discrete pieces: the 2-year rate which is always the same as the policy rate. A 5-year rate in 5-years time that is equal to the inflation target (2% say) plus some real rate (say 0.5%) so is constant at 2.5% if the central bank has 100% inflation credibility. Plus a 3-year rate in 2-years time that interpolates between those two.
So the policy rate = 0% since the central bank want to be accomodative and spur growth. So the 2-year rate in this toy model is 0%, the 5y5y rate is 2.5% and the 3y2y rate is say 1%. So the 10y rate is going to be about (2×0+3×1+5×2.5)/10 so 1.55% or so. So the 2y vs 10y spread is 1.55%.
A few years later, the central bank wants to reign in an overheating economy and rising inflation expectations. So it moves policy rates to say 3%. The 5y5y rate is still 2.5% since they have inflation credibility. The 3y2y rate is say 2.75%. So the 10y rate is (2×3+3×2.75+5×2.5)/10 = 2.67%. The 2y vs 10y spread is now -0.33%. Oh my god … the world is ending because it’s inverted!
No. It’s just a completely mechnical process. It’s basic logic. Initially, the policy rate was below the long-term expectation since the central bank wanted expansion. So the curve was steep since it needed to mean revert to the long term expectation.
Later the central bank wanted to reign in inflation and growth so they needed restrictive policy … which is higher than the long term expectation. So the curve needs to mean revert lower (i.e. inverts in forward space). With enough forward inversion and spot policy rates rising, that will eventually invert the spot curve.
Clearly if the central bank runs restrictive policy, they want to slow growth and inflation. If they want to do this, then assuming they have some credibility, the market must price a higher probability of lower growth … and thus a higher probability of recession. So yield curve inversion doesn’t predict recessions. The yield curve is just a representation of the probability density for policy rates which in itself is a function of growth and inflation expectations. Yield curve flattening is just a mechanical result of the market shifting expectations to slower growth. Given enough of a shift it will invert.
Thanks for the link 🙂
The curve had inverted several times in the past decade, and nothing really happened (well, except for COVID, but that goes without saying). Yes, the inverted yield curve is indeed a leading indicator of a recession, but then again, so are Broadway ticket prices 😉
So maybe a recession is coming, or perhaps the market simply thinks that the inflation we’re currently seeing will be short lived?
I liked the Deep Roots article. It echoes some of what Josiah Thompson said in The Umbrella Man, only in the context of long-term forecasting. I wonder though if the sort of long-term forecasting that Morgan Housel is talking about is much of an industry. There’s little profit in forecasting so far into the future – you only need to get onto the right train a few minutes before it leaves the station – unless you’re China and have enough cash to buy Africa 😉 . As for everyone else, sitting on the right train for hours before departure is a waste of time. I doubt Jeff Bezos envisaged AWS when he started a book store from his garage, he only needed to be smart enough to recognise the opportunity when it presented itself.
The obvious subtext of submitting readings on March 31st was to inflate them. Clearly not ethical but financially astute.
Btw I’m on a fixed tarriff so just a casual observer….
Relevant?
The trouble with passive investment is that it’s so boring
It works best if you buy and forget and certainly do not meddle
That’s a hard call for people interested in investing(gambling)
However I have discovered that continuing to learn about financial matters by lurking-perhaps contributing a little-has given me more than enough excitement without having to go into active mode -so far!
Possibly on a more positive note it continually reminds me to keep my hands well and truly behind my back at all times!
xxd09
@Fabius : try yahoo finance : I don’t know if this is exactly the same fund variant, but, for example:
https://uk.finance.yahoo.com/quote/0P0000TKZK.L/history?p=0P0000TKZK.L
@e17jack. Unless I submit extra meter readings, my usage is averaged over 6 months, so the fortnight of good weather in March and week of bad weather in April have less effect than all that cold high usage winter leaking into the warm near zero usage spring when the gas company estimates my meter reading for 1st April price rise.
I agree 100% with @xxd09. I find the articles linked to active investing (and the economy in general) fascinating and informative – but most of all they serve as a regular reminder that I should stay well away from it. For me, a site that promotes passive investing is all the more effective for opening people’s eyes to the reality of the alternative.
@Fabius ft.com are putting that data behind a paywall. It was a reliable source for importing prices into google sheets with the IMPORTDATA command. Everything in consistent tables and wide coverage.
Does anyone else here use the IMPORTDATA function to read live or last closing prices for funds, stocks, ETFs into spreadsheets, a suggested data source that supports it?
Its been an interesting quarter. The S&P500 and Nasdaq have not fallen anything like enough so still avoiding them, as well as most bonds except a shorter dated allocation.
As of yesterday my mainly value/high yield income portfolio is up 4% YTD vs -5% on VWRL, -7% on IGLT, and -4.6% on S&P500.
Who knows if it will last for the rest of the year, but I struggle to see a typical 60/40 portfolio overtaking it in the next three quarters when bonds and rate sensitive tech, at already such high historic multiples, make up such a high proportion of these typical passive tracker allocations.
Anyway, I’m sticking with a plan and not reacting to news other than jettisoning an EM $ Bond ETF just prior to the Russians invading Ukraine.
Said ETF has taken a pasting YTD but is now looking like one to start buying back into again soon with a 6%+ yield and the exclusion of the evil empire (well, one of them).
Also looking to add some European equity income over the remainder of the year.
I know they always say you shouldn’t chase yield, dividends are no free lunch etc. but it seems the least worst option given where real rates, inflation and US valuations are.
People seem to forget the S&P500 is capable of going virtually nowhere in a decade, and pays naff all in dividends to compensate.
There is Google IMPORTXML function and may help, select 1, 2, 3…data fields
=index(importxml(“https://markets.ft.com/data/funds/tearsheet/summary?s=GB00B4KWNF91:GBP”,”//span[@class=’mod-ui-data-list__value’]”,1))
=IMPORTXML(“https://www.morningstar.co.uk/uk/funds/snapshot/snapshot.aspx?id=F00000MLUR”, 1)
@Onkar copying either of those commands into Google sheets gives #ERROR! Formula parse error.
@SemiPassive, #11
” As of yesterday my mainly value/high yield income portfolio is up 4% YTD vs -5% on VWRL, -7% on IGLT, and -4.6% on S&P500. ”
Do you manage your value/high yield portfolio actively or passively? If the latter, how? I am exposed to more tech than I want to be (and it’s my job as well, so correlation there too) but don’t see the cheap funds to use.
I don’t (yet) understand ETFs and the charges that come with them so have avoided them to date.
@Indicisive, I make active decisions about overall asset allocation (global equity, infrastructure, different types of bonds, cash and so on) and how much to place in each specific fund. I have a mix of passive ETFs (e.g. that track their own specific index) and actively managed investment trusts. The fees for the latter are higher obvs. Most of them have an income bias.
I am generally a long term buy and hold type of person, so when investing either new money or cash received from dividends/distributions, it is a question of whether to top up existing holdings or add a new fund that I feel adds income diversification over what I already have. I try and not do too much selling, chopping and changing.
I intend to eventually live largely off the income from these investments, virtually on autopilot. Still a few years off retiring, but it is not like I have decades to go. So valuations matter to me.
FWIW if I was in my 20s or 30s, or even 40s, I would stick to a simple global tracker.
@MRN and @Owl – I hadn’t thought to look at Yahoo Finance as I seemed to remember it had stopped working, or its selection of funds etc became extremely poor at some point? That was when I switched to FT.com a few years ago anyway. But Yahoo does seem a lot better than it once was, so thanks for the pointer.
Odd that, if the FT.com is putting Historical Prices behind a paywall as seems likely, it currently just shows as blank. I’d expect some kind of upselling advert.
@Fabius @MRN @Owl
I also use IMPORTXML in Google sheets with the FT as the source and have noticed it can be a bit spotty from time to time. In particular, it seems to do better some days with “/html/body/div[3]/div[2]/section[1]/div/div/div[1]/div[2]/ul/li[1]/span[2]” as the xpath_query vs ”//span[@class=’mod-ui-data-list__value’]”. No idea why, and often within a day or two its back to normal.
Have you checked whether the ETF/fund you’re scraping is on Google Finance? As its baked into Sheets I’ve found it to be much more stable.
Very interesting from the Evidence Based Investor blog on the FCA’s ‘Assessment of Value’ documents. Clearly a total waste of time and money. The FCA really seem to add very little for normal investors other than cost – they utterly fluffed the mini-bond scandal (for example) and did nothing, despite many warnings over years, until the whole thing blew up. Smaller
banks, financial and investment firms seem to be continually ‘consolidating’, with resulting loss of service and reduced competition. And somehow it has over 4,000 employees, paid for by the consumer, doing what exactly?
Looks like ft.com historical data is available again without the paywall.
@Fabius @MRN @Owl @LALILULELO
I use the following in Google Sheets to get the fund price (replace …F00000TXY9 with your desired fund).
=REGEXREPLACE(index(importhtml(“https://www.morningstar.co.uk/uk/funds/snapshot/snapshot.aspx?id=F00000TXY9″,”table”,4),2,3),”\D+”, “”)/100
The ‘100’ is to convert to your desired pounds, shillings or pence).
I find it good in terms of accuracy (For important decisions I ALWAYS cross check my spreadsheet with my platform portfolio).
In terms of reliability…very occasionally it doesn’t appear to be able to retrieve a fund price (you get a cell error), but if I wait an hour or two (or even minutes, sometimes), and check again it sorts itself out.
I use it with a portfolio of 17 funds.
@MRN You’re right, it’s back! Very strange. Maybe just a temporary technical glitch.
@Nun Warthead your formula for importing data. If anyone does a copy paste directly from your post above into Google sheets they’ll get a parse error. The fix is to enter all the quote marks again in plain text (in the above post most the quote marks are font style formatted.)
@Indecisive: Take a look at Vanguard’s world high dividend yield index ETF, VHYL, or its accumulating version, VHYG. This has a useful value tilt and has been doing its job recently, hitting new highs including today when the US and Global index trackers took another hit. In the long term VHYL is not a great performer, though. I hold 10% for a bit of diversification despite the fact that it partly duplicates my other buy/hold/rebalance equity ETFs GSPX (US £hedged) and VEVE (developed world un£hedged).