The Shape of Things to Come?

Published: April 1, 2019

There has been considerable discussion over the past few months regarding the shape of the yield curve, and what it might signify for the economy. The yield curve, which shows yields on U.S. Treasuries at different maturities, is typically upward sloping, because investors in longer-term assets typically demand higher rates, known as a “term premium,” as remuneration for tying up their funds for a longer period, specifically to compensate for inflation risks.

Flat, flat, inverted
Recently, however, the curve has flattened, and even temporarily inverted, meaning that yields on longer-term assets are close to, or even lower than, those on shorter-term Treasuries. In the past, views on bond yields have often reflected expectations for future economic growth overall. If investors are worried about slowing future growth and lower rates, they may be more willing to buy longer-term Treasuries to lock in current rates, thus driving down current yields on longer-dated maturities. As demand increases, the Treasury is also able to lower the rates it offers on newly issued long-term Treasury securities. Historically, the last seven recessions have been preceded by a yield curve inversion, leaving many to wonder if a recession is looming on the horizon.

Too soon to tell
So far, the yield curve has not inverted for long enough to serve as a strong warning signal, and the inversion was very slight. A flat curve is not as strong a signal that an economic downturn may be ahead. More data points, a more prolonged inversion, and/or a steeper curve would tell a more definitive story.

Other factors at work
There are also other factors that influence term premiums and yield curves, and some of them may be having a greater impact in the current environment than in the past. One in particular is the role that the Fed has taken in the post financial crisis era in quantitative easing through asset purchases on the secondary market of government and agency securities. Partly as a result of this, the term premium has declined significantly. With that lowered term premium comes a higher likelihood of a flat or inverted yield curve.

Watching carefully
However, yields and yield curves are not the only sign of things to come, and we recognize that the U.S. has experienced an unprecedentedly long period of growth. As always, we are keeping a close eye on the economy, the global situation, and a broad range of other indicators for their potential impact on our client portfolios. As long-term strategic investors, we are focused on growing and preserving wealth for future generations, while also seeking to take advantage of short-term inefficiencies in the market.

We encourage you to contact us at 212.492.7000 with any questions you may have regarding current markets or your portfolio. We believe communication is critical to an enduring relationship. As always, your Klingenstein Fields Advisors’ team is ready to serve you, whatever your needs may be.

Important Disclosures

This material is provided for informational or educational purposes only and should not be construed as investment, accounting, tax or legal advice. Always consult a financial, tax and/or legal professional regarding your specific situation. This communication is not intended as a recommendation or as investment advice of any kind. It is not provided in a fiduciary capacity and may not be relied upon for or in connection with the making of investment decisions. Nothing herein constitutes or should be construed as an offering of advisory services or an offer to sell or a solicitation to buy any securities or a recommendation to invest in any specific investment strategy. Investing involves risk, including the possible loss of principal. Past performance is not indicative of future returns. The views expressed herein are as of a particular point in time and are subject to change without notice. The information and opinions presented herein are general in nature and have been obtained from, or are based on, sources believed by Klingenstein Fields Advisors (“KF Advisors’) to be reliable, but KF Advisors makes no representation as to their accuracy or completeness. Although the information provided is carefully reviewed, KF Advisors cannot be held responsible for any direct or incidental loss resulting from applying any of the information provided. KF Advisors represents two investment advisers registered with the Securities and Exchange Commission: Klingenstein, Fields & Co., L.P. and KF Group, LP. If you are a KF Advisors client, please remember that it remains your responsibility to advise KF Advisors, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services.