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TheStreet Open House

Little Concern About Inverted Curve

Few Wall Street phrases have proven costlier to investors than: "This time it's different." From Dutch tulips to Internet stocks, the promise of a new paradigm has generally led to financial pain rather than overflowing profits.

Keeping that squarely in mind, what's a shareholder to do when his bond fund manager swears that the recently inverted yield curve will not once again lead to an economic recession because "this time it's different"?

Well, if your solution is "ask another fund manager," don't bother. They are all whistling the same tune.

"Yes, the curve has touched on an inversion. And yes, the curve could invert further. But there are some fundamental reasons why this is occurring," says Brian Stine, investment strategist for Allegiant Funds. "And it does not necessarily foreshadow the end of the world, or even the end of the healthy economy and markets as we have known them this year."

The end of the world may not be nigh, but what has traditionally been a very good sign of financial apocalypse, or at the very least an economic downturn, appeared last week when the yield on the two-year Treasury note briefly traded above the three-year and five-year Treasuries.

The difference was roughly a basis point, which may seem like a pretty small amount to get all worked up about, especially considering it was erased when the yields soon flattened. Moreover, the benchmark 10-year Treasury bond, which is generally viewed as the yardstick when measuring curve inversion, was yielding roughly 4.4% at the time, a full 8 basis points above the two-year Treasury note.

Nevertheless, as Tony Crescenzi, chief bond market strategist at Miller Tabak and contributor, points out, every inverted yield curve since 1970 has been followed by a period in which S&P 500 earnings growth was negative, and has almost always preceded either an economic slowdown or a recession.

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