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yuxdhk
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Joined: July 3rd, 2015, 7:49 am

Is the Treasury Yield spread best in class forecastor for recession

May 29th, 2019, 3:36 am

Headline from Bloomberg this morning, the treasury 3m/10year spread turned negative led the market emotion swing into negative from positive during a single trading day. People got spooked and dumping their shares. I am wondering if the market is producing false positive for recession based on the old market wisdom with all the QE and Quants model based trading reinforcing the signals into reality.   How can we see the truth of the economy? Or it is becoming a self fulfilling story so we should just ride with the crowd?

https://www.bloomberg.com/news/articles ... xed-income
https://www.bloomberg.com/opinion/artic ... d-on-rates
 
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Alan
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Re: Is the Treasury Yield spread best in class forecastor for recession

May 29th, 2019, 7:56 pm

Historically, those spreads are pretty good indicators of recessions. The problem with attempting this kind of market timing is that, even if you know you entering a recession, the stock market will typically bounce back at recession lows. So, while you may get out and avoid some pain, wait 'till it's over and you'll get back in too late. In other words, knowing the truth of the economy is overrated.

Better to simply find some (low cost, balanced) index fund that you are reasonably comfortable holding during recessions, and stick with it for 20-30 years.  By 'reasonably comfortable' I mean 'not too uncomfortable' -- i.e., you don't get scared out of your position. 
 
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yuxdhk
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Posts: 10
Joined: July 3rd, 2015, 7:49 am

Re: Is the Treasury Yield spread best in class forecastor for recession

May 30th, 2019, 1:53 am

Thank you Alan. Yes I agree that auto-attributing to some balanced index funds to save for your retirement is good idea. But it is fairly difficult to stay out of game when you are in the industry. I wonder if the recession risk is overstated as yield curve behavior has been somewhat self fulfilling by the machines and quants' model trading (i.e. is now a good buy opportunities)?
 
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Alan
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Re: Is the Treasury Yield spread best in class forecastor for recession

May 30th, 2019, 4:02 am

Well, as the old saw goes, it's a market of stocks, not a stock market. Everyone can find some things to like and especially things to like 10% lower. 
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