Longer-term bonds now appear to be a better bet for those investing in the debt market
A typical bond yield curve shows that longer-term issues yield more than shorter-term ones. But that curve has been inverted since July of 2022 – a situation that usually foreshadows a recession.
Not at all. An inverted curve typically flips back to a more normal state immediately before a recession hits. And so after the spikes in yields of the past few weeks, the best opportunities of where to buy in the credit sector have shifted: Longer-term bonds now appear to be a better bet for those But there are several places to look for recessionary signals in credit markets. Most attention is paid to the spread between two- and 10-year bonds and its current inversion. I think it’s less accurate now as a recession predictor, because we are in an era where central banks intervene more to influence interest rates. They use quantitative easing and tightening, which lessens the effect of market forces. Furthermore, once the curve inverts, a recession will not immediately follow.
Either way, we need to be patient to see if that holds true now. Recessions are officially confirmed only after they begin. However, with the recent sharp gains in long-term yields – which have not been accompanied by any noted rises in inflation – things have changed. Market timing is always difficult, but if I were still a bond trader, I would be easing in and buying long bonds. These yields won’t go up indefinitely, and investors have oversold them as prices have declined.
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