Yield Curve Is Steep - Which Means It's a Good Time to Invest

When the yield curve is this steep, it is usually a good time to invest in stocks.

Why?

Because a steep yield curve usually indicates an increase in future economic activity.

It may be that the steepness is a reflection of inflationary fears. It may also simply be overwhelming supply. Or, more likely, it is a combination of all three.

However, I would not bet against history. A steep yield curve is good for the financial system, which can repair itself by feasting on risk-free fat long yields while paying their depositors nothing. This re-liquefies the banks which can then start lending again, or at least cushion the blow from rising defaults.

For the record, I am less invested than I was a month ago but I still have significant equity exposure.

Comments

[punk_ash:]

I disagree completely.

The yield curve will steepen for 2 reasons, one being that the economy recovers and the low interest to boost demand will be jacked up by the central banks, and the 2nd reason will be that no one wants your debt and the yields will go up when the value of your debt falls. There may be some of the effect from the 1st reason, but surely the main reason is the latter.

How is that any good now?

Jun 01 04:10 AM

[DerekNJND:]

Great article by the orignal poster.

I just blogged about how inflation and treasury yields actually could be GOOD for the stock market in 2009, instead of reasons to sell off. People only hear the negative side of both issues, especially inflation. But the bottom line is the cost of everything becomes inflated. So why not buy stocks now before that happens? Not only an inflation shield for you but your deflated shares will earn quite a return by the time inflation rises to the level most pundits predict.

If future inflated prices are not good for the market, please tell me why this rally keeps going and going and going like the Energizer Bunny? Trillions of dollars are hitting the US equity markets, so its not really up for debate, its either get on the ship or be left standing on the dock and get in when prices are double spring 2009 levels.

There won't be this huge selloff that everyone is sitting around waiting for. Why? Because institutional money has pushed prices the last 3 months, mostly April and March. That funding will only increase, as those who are already in got in so cheap they have absolutely no incentive to dump shares. Banks are working together to keep the market propped up until more funding hits the equities markets, which it will as soon as bears waiting for the 200 day MA (which is 5 points away) start abandoning their caves and the losing battle of shorting this steamroller and jump into the market too.

So another challenge to you bears--who is going to spark this selloff or correction down to S&P 700 or lower? We'd need all the gains the last 3 months to be erased in a pretty widescale market selloff, and right now, only bulls own stock, and they're not selling anything but call options to those who missed the boat.

Jun 01 04:29 AM

[Alphameister:]

Good article. Don't fight the tape, and don't fight the Fed. Both are now bulllish (though I also am less long than I was a month ago as the reward-risk ratio is less compelling).

Jun 01 08:56 AM

[Billy Ford:]

Derek,

You answered your own question..Who will initiate the sell off? The people who cant resist locking in 30-40% gains after realizing they are sitting on another time bomb....I wouldnt be so pessimistic about the economy if I didnt think that all is this hype is a tad premature...It will catch up to us..just be patient

Jun 01 09:34 AM

[Baboon:]

If no one wants the debt wouldn't it be logical to assume that the both long term and short term debts are undesirable by the market with the same degree? The premise of the argument in the article is that the relative spread between long-term and short-term debts is rising which should be a good indicator of the economic growth.


On Jun 01 04:10 AM punk_ash wrote:

> I disagree completely.
>
> The yield curve will steepen for 2 reasons, one being that the economy
> recovers and the low interest to boost demand will be jacked up by
> the central banks, and the 2nd reason will be that no one wants your
> debt and the yields will go up when the value of your debt falls.
> There may be some of the effect from the 1st reason, but surely the
> main reason is the latter.
>
> How is that any good now?

Jun 01 10:56 AM

[KIT:]

Paper gains of 40% or 100% are just that till you sell the stock and hold CASH in your hand. Up till that time gloating over unrealized gains is for dreamers


On Jun 01 09:34 AM futurestrader wrote:

> Derek,
>
> You answered your own question..Who will initiate the sell off? The
> people who cant resist locking in 30-40% gains after realizing they
> are sitting on another time bomb....I wouldnt be so pessimistic about
> the economy if I didnt think that all is this hype is a tad premature...It
> will catch up to us..just be patient

Jun 01 03:28 PM

[KIT:]

You forget there are millions of baby boomers who did the right thing and put $500 a month into funds only to lose 50% of the value. 30% increase from bottom is only 15% of the loss regained. Talking to many people who are about to retire they will pull out on any more drops. They are terrified of destroyed retirements. Even if markets make a return to highs they will grab the lot and cash out. Higher interest rates fo GICs make the choice easier to get out. Input from the baby boom got us to 14000 from 1995 ( the year the first of the BB turned 50 and took interest in the market ) Their removal will put us back to 1994 levels......

On Jun 01 04:29 AM DerekNJND wrote:
>
> There won't be this huge selloff that everyone is sitting around
> waiting for. Why? Because institutional money has pushed prices the
> last 3 months, mostly April and March. That funding will only increase,
> as those who are already in got in so cheap they have absolutely
> no incentive to dump shares. Banks are working together to keep the
> market propped up until more funding hits the equities markets, which
> it will as soon as bears waiting for the 200 day MA (which is 5 points
> away) start abandoning their caves and the losing battle of shorting
> this steamroller and jump into the market too.
>
> So another challenge to you bears--who is going to spark this selloff
> or correction down to S&P 700 or lower? We'd need all the gains
> the last 3 months to be erased in a pretty widescale market selloff,
> and right now, only bulls own stock, and they're not selling anything
> but call options to those who missed the boat.

Jun 01 03:38 PM

[DerekNJND:]

well, not to say "I told ya so" but low and behold, the huge correction everyone was awaiting turned out to be an 8-10% setback on the S&P, less for many individual stocks.

So futurestrader, exactly as I asked before, I just dont see the amunition for this sellof the bears have been predicting. Traders are taking profits from March, theyve been doing that the whole way up . Thats why we get 5% corrections all the time. But institutional investors are either flat or in net accumulation, they're not buying in July to sell in August. Their timeframe is much longer than that, especially given that equities prices are very discounted STILL.

I enjoy watching bears be converted--but the only thing that stinks is when the bears seem to have disappeared, theres no new buyers left! So please, keep yukking it up bears. You give me confidence to keep buying.


On Jun 01 09:34 AM futurestrader wrote:

> Derek,
>
> You answered your own question..Who will initiate the sell off? The
> people who cant resist locking in 30-40% gains after realizing they
> are sitting on another time bomb....I wouldnt be so pessimistic about
> the economy if I didnt think that all is this hype is a tad premature...It
> will catch up to us..just be patient

Aug 09 01:36 AM