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The End of the Yield Curve Inversion
One of the most reliable recession indicators over the last 5 decades, the yield curve, is flashing recession warnings.
In response to weaker labor market data and the potential for Fed rate cuts, the yield curve (10-year Treasury yield minus 2-year Treasury yield) has returned positive for the first time in over two years.
Source: Morgan Stanley
Historically, that signal (the un-inversion) has preceded the start of each recession like a shadow.
Ok, maybe not always, except in cases where the duration was “lightning quick” (few weeks).
This occurs because market participants, anticipating future rate cuts to combat a downturn, drive long-term rates lower.
What does that mean for the US Economy?
Historically, there’s been about a 7-month lag on average between the first inversion and the onset of a recession.
If history is any guide, the prolonged inversion we experienced could set the stage for another economic downturn.
Source: Goldman Sachs
S&P 500 returns, on average, are rather low, around 2%, in the first month following the un-inversion and -2% in the next half-year.
Even if the economy avoids a recession 3 months after a yield curve un-inversion, the average return is around 1%, and 6 months after, the average return is around 2%[1] – not impressive at all.
So what are the investment alternatives?
The time for bonds has arrived
Following the first Fed cut, bonds averaged 10% returns.
Source: Edward Jones
Fixed income returns are a function of duration, which refers to a bond’s sensitivity to interest rate changes.
Falling rates would typically cause long-term bond prices to rise.
The easing Fed cycle is precisely what will drive lower rates.
The Fed’s Next Move
The Federal Reserve has been in a rate-hiking cycle for over two years now, but Fed chair Powell has implied that lower rates are coming.
A slowdown in the labor market has raised concerns about a wider economic decline.
The first cut is anticipated to come at the September 18 FOMC meeting, with a reduction of 0.25%, rather than 0.5%, quite likely given the hotter-than-expected inflation data yesterday.
Conclusion
Some market participants hope that lower rates will stave off a recession.
It’s important to remember that rate cuts work with a lag or take time to filter through the economy.
Markets, on the other hand, are forward-looking mechanisms, and some, especially in the fixed-income space, offer very accurate signals of what’s coming next.
Owning high-quality and less economically sensitive assets like bonds should add some cushion in case economic and earnings growth tumble.
Investors can long the 500 largest stocks in the US using our 3x US 500, 5x US 500.
Alternatively, traders can short the 500 largest stocks in the US using our -3x US 500.
Investors can long-duration bonds using our 5x 20+ Year Treasury Bond.
Alternatively, traders can short the long-duration bonds using our -5x 20+ Year Treasury Bond.
Footnotes:
Your capital is at risk if you invest. You could lose all your investment. Please see the full risk warning here.
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The ETP securities are intended for sophisticated investors who (i) are able to monitor their investment in the ETP securities on a frequent basis in line with the recommended holding period; (ii) understand the risk of compounded returns and the increased risk of investment in leveraged products; (iii) can afford to risk losing their investment; and (iv) and have a very short investment horizon in line with the recommended holding period. Please ensure that you fully understand the risks involved. If in any doubt, please seek independent financial advice. Investors should refer to the section entitled “Risk Factors” in the relevant prospectus for further details of these and other risks associated with an investment in the securities offered by the Issuer. This material is not intended to be relied upon as a forecast, research or investment advice and is not a recommendation, offer or solicitation to buy or sell any financial instrument or product or to adopt any investment strategy. Any decision to invest should be based on the information contained in the relevant base prospectus after seeking independent investment, tax and legal advice.
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The value of an investment in ETPs may go down as well as up and past performance is not a reliable indicator of future performance. Trading in ETPs may not be suitable for all types of investor as they carry a high degree of risk. You may lose all of your initial investment. Only speculate with money you can afford to lose. Changes in exchange rates may also cause your investment to go up or down in value. Tax laws may be subject to change. Please ensure that you fully understand the risks involved. If in any doubt, please seek independent financial advice. Investors should refer to the section entitled “Risk Factors” in the relevant prospectus for further details of these and other risks associated with an investment in the securities offered by the Issuer.
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Nothing on this website is advice on the merits of any product or investment, nothing constitutes investment, legal, tax or any other advice nor is it to be relied on in making an investment decision. Prospective investors should obtain independent investment advice and inform themselves as to applicable legal requirements, exchange control regulations and taxes in their jurisdiction.
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Terms and Conditions
Notice
If you are not classified as an institutional investor, you will be categorised as a private/retail investor. At this time, we cannot send communications directly to private/retail investors. You are welcome to view the contents of this website.
If you are an ‘Institutional investor’, you affirm either that you are a Per Se Professional Client, or that you wish to be treated as an Eligible Counterparty Client, both as defined under the Markets in Financial Instruments Directive, or an equivalent in a jurisdiction outside the European Economic Area.
Risk Warnings
The value of an investment in ETPs may go down as well as up and past performance is not a reliable indicator of future performance. Trading in ETPs may not be suitable for all types of investor as they carry a high degree of risk. You may lose all of your initial investment. Only speculate with money you can afford to lose. Changes in exchange rates may also cause your investment to go up or down in value. Tax laws may be subject to change. Please ensure that you fully understand the risks involved. If in any doubt, please seek independent financial advice. Investors should refer to the section entitled “Risk Factors” in the relevant prospectus for further details of these and other risks associated with an investment in the securities offered by the Issuer.
This website is provided for your general information only and does not constitute investment advice or an offer to sell or the solicitation of an offer to buy any investment.
Nothing on this website is advice on the merits of any product or investment, nothing constitutes investment, legal, tax or any other advice nor is it to be relied on in making an investment decision. Prospective investors should obtain independent investment advice and inform themselves as to applicable legal requirements, exchange control regulations and taxes in their jurisdiction.
This website complies with the regulatory requirements of the United Kingdom. There may be laws in your country of nationality or residence or in the country from which you access this website which restrict the extent to which the website may be made available to you.
United States Visitors
The information provided on this site is not directed to any United States person or any person in the United States, any state thereof, or any of its territories or possessions.
Persons accessing this website in the European Economic Area
Access to this site is restricted to Non-U.S. Persons outside the United States within the meaning of Regulation S under the U.S. Securities Act of 1933, as amended (the “Securities Act”). Each person accessing this site, by so doing, acknowledges that: (1) it is not a U.S. person (within the meaning of Regulation S under the Securities Act) and is located outside the U.S. (within the meaning of Regulation S under the Securities Act); and (2) any securities described herein (A) have not been and will not be registered under the Securities Act or with any securities regulatory authority of any state or other jurisdiction and (B) may not be offered, sold, pledged or otherwise transferred except to persons outside the U.S. in accordance with Regulation S under the Securities Act pursuant to the terms of such securities. None of the funds on this website are registered under the United States Investment Advisers Act of 1940, as amended (the “Advisers Act”).
Exclusion of Liability
Certain documents made available on the website have been prepared and issued by persons other than Leverage Shares Management Company. This includes any Prospectus document. Leverage Shares Management Company is not responsible in any way for the content of any such document. Except in those cases, the information on the website has been given in good faith and every effort has been made to ensure its accuracy. Nevertheless, Leverage Shares Management Company shall not be responsible for loss occasioned as a result of reliance placed on any part of the website and it makes no guarantee as to the accuracy of any information or content on the website. The description of any ETP Security referred to in this website is a general one. The terms and conditions applicable to investors will be set out in the Prospectus, available on the website and should be read prior to making any investment.
Leverage Investment
Leverage Shares exchange-traded products (ETPs) provide leveraged exposure and are only suitable for experienced investors with knowledge of the risks and potential benefits of leveraged investment strategies.
Cookies
Leverage Shares Management Company may collect data about your computer, including, where available, your IP address, operating system and browser type, for system administration and other similar purposes (click here for more information). These are statistical data about users’ browsing actions and patterns, and they do not identify any individual user of the website. This is achieved by the use of cookies. A cookie is a small file of letters and numbers that is put on your computer if you agree to accept it. By clicking ‘I agree’ below, you are consenting to the use of cookies as described here. These cookies allow you to be distinguished from other users of the website, which helps Leverage Shares Company provide you with a better experience when you browse the website and also allows the website to be improved from time to time. Please note that you can adjust your browser settings to delete or block cookies, but you may not be able to access parts of our website without them.
This website is maintained by Leverage Shares Management Company, which is a limited liability company and is incorporated in Ireland with registered offices at 2 Grand Canal Square, Grand Canal Harbour, Dublin 2.
By clicking you agree to the Terms and Conditions displayed.
