Markets are again in the red this AM about the Yield curve going deeper into inversion. With the 10 year at a yield of 2.1% and the 3 month at 2.34%, it pays to keep your money in cash short term while avoiding locking in anything further out on the curve. This has been a sign of a recession in the past and has the markets starting to sell off as a result. Long term what does this mean?
If a recession is on the horizon it is almost guaranteed that the expected that the Fed will react. A curve that is this inverted is a telling sign that many investors are expecting the shorter end of the curve to come back in line with the expectations priced into the longer end of the curve. If these cuts do occur, and remain lower for longer, like we have seen in the past, there is a good chance of getting a rise in assets providing the yield that many investors require.
Banks will be one of the beneficiaries of lower rates. A steepening yield curve is where traditional banks earn their profits. While the curve is flat or negative they have to borrow at a higher rate then they are lending. This will slow their ability and desire to lend money, slowing the economy, and causing the Fed to look at lowering rates. ETFs like the KBW Regional Banking are becoming cheaper in the sell-off and starting to get a yield that is nearing the 3 month. As the market continues to price in the trade wars and recessionary fears, financial ETFs might be worth looking at. If the Fed goes on a program of interest rate cuts, the profitability metrics of these companies will increase, and the yield they provide will look more attractive.