This too shall pass. ( Inverted treasury curve)

[srinir]

Predicting the yield curve that predict recessions.

https://files.stlouisfed.org/resear...inversions-that-predict-recessions-part-1.pdf

https://research.stlouisfed.org/pub...rve-inversions-that-predict-recessions-part-2

Figure 1 demonstrates that housing expectations consistently decline before a recession—before even yield curve inversions in many cases. Given the frequency of this phenomenon with housing expectations, the evidence makes it reasonable to expect that future housing trends will experience downturns before a yield curve inverts

Housing expectations have been shown to be an important indicator of future economic activity and should be considered when forecasting recessions. Given the evidence presented in this essay, this simple forecast implies that a yield curve inversion will be preceded by a decline in housing expectations and be followed by a recession approximately a year later

 

[ironchef]

If I eyeball the yield curve today, I cannot see the inversion.

 

[sle]

If I eyeball the yield curve today, I cannot see the inversion.

It's at 12 bps right now (give or take depending on what you use as 10s yield, CMT or OTR).

 

[Kevin Schmit]

If I eyeball the yield curve today, I cannot see the inversion.

That's because there really isn't one. Here is a snapshot curve from today (basis 3pm NY):

SDATE__ ,_ FF,_ M1,_ M2, M3,_ M6,_ Y1,_ Y2,_ Y3,_ Y5,_ Y7,_ Y10, Y20, Y30
20190415, 2.41, 2.42, 2.43, 2.43, 2.46, 2.43, 2.40, 2.36, 2.37, 2.46, 2.55, 2.77, 2.96

Note the 2yr is below the 10yr, so no inversion on the usual 2-10 metric. 3month is also slightly below both the 7yr and the 10yr, so those alternatives are not inverted either.

FF in the curve above is a guess (a pastcast), as effective FF rate for today isn't available yet, but is unlikely to be off by more than a few bps.

 

[sle]

Bond yield = Expected short term rate + Term premium

There is an argument and most people engaging in the risk parity are kinda expressing it through their portfolios for a reduction in term premia in it's classic form. The idea is that govies actually have favorable risk properties, i.e. actually serve as insurance against recessions so you shouldn't get paid term premia. Of course, that would only work as a consequence of low and stable inflation. Dunno, just rambling.

 

[srinir]

There is an argument and most people engaging in the risk parity are kinda expressing it through their portfolios for a reduction in term premia in it's classic form. The idea is that govies actually have favorable risk properties, i.e. actually serve as insurance against recessions so you shouldn't get paid term premia. Of course, that would only work as a consequence of low and stable inflation. Dunno, just rambling.

I haven't heard/read this argument before, it does make lot of sense. Is risk-parity universe big enough compared to the traditional assets management universe?

In one of my accounts, I did ran risk-parity home made style. But put into hiatus after very flat yield curve. It doesn't make sense when borrow rate was higher than 2 year yield.

 

[srinir]

Is risk-parity universe big enough compared to the traditional assets management universe?

Answering my own question, Callan table says $120 billion in 2016. Even with 5 or 6 times levered, it is not much at all.

 

[srinir]

https://www.researchaffiliates.com/en_us/insights/conversations/the-inverted-yield-curve.html

One insightful comment is that yield curve inversion has to sustain full qtr.

"That said, in my dissertation I stated that the inversion must be sustained at least over a full quarter—just inverting for a couple of days or a week is not enough. The logic behind using a full quarter is that GDP is what we’re trying to forecast, and GDP is measured over a quarter, not over a day"