Monday, December 03, 2018

Waiting for the Yield Curve to Invert

A 2yr/10yr yield curve inversion has preceded every post WWII recession.  However, not every inverted yield curve was immediately followed by a recession.  Even so, a recession typically doesn't happen until 9-24 months after the yield curve inversion.

Basically, the yield curve inverts when the 2 year yield is higher than the 10 year yield.  This means that investors are expecting the economy to be better near term than in the long term, and therefore, are willing to take lower yields long term.

Here are couple articles on the phenomenon.   Inverted Yield Curve and How It Predicts a Recession  and Inverted Yield Curve? Recession? Not So Fast

Based on this indicator, I will assume market declines are corrections and not the beginning of a bear market, until the yield curve inverts.   Thus, I will maintain our core holdings and only trade the peripheral holdings.   However, once the yield curve inverts, I plan to sell and reduce our core holdings in preparation for a significant market decline.

At this point, the 2yr/10yr yield curve is flattening but still not inverted.  So we will continue to keep our core holdings while trading the peripheral holdings.

For more on Strategies and Plans, check back Mondays for a new segment.

This is not financial or investment advice. Please consult a professional advisor.

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