20181206-招银国际-US_Yield_Curve_Inversion_Spells_Trouble_Ahead_3页_610kb

US Yield Curve Inversion Summary

Core Content

The document discusses the recent inversion of the US yield curve, highlighting its implications for the economy and stock markets. It outlines the historical significance of the yield curve as an indicator of economic conditions and warns of potential recession risks. The analysis is conducted by Angela Cheng, PhD, from CMB International Securities Limited (CMBIS), and includes various disclosures and ratings.

Main Points

• Yield Curve Inversion: The first yield curve inversion since 2007 occurred between the 3-year and 5-year Treasury yields, reaching a negative spread of 1.2 bps. This inversion is a sign of economic concern and is often associated with a potential recession.

• Yield Curve Shape: The yield curve has flattened significantly, with short-term rates rising and long-term rates falling. The 3-month T-bill rate increased to 2.42%, while the 10-year rate dropped to 2.91%.

• Economic Indicator: The yield curve reflects market sentiment and serves as a predictive tool for economic downturns. Historically, every US recession in the past 60 years was preceded by a negative term spread.

• Predictive Power: The inversion of the 2-year and 10-year yield spread is considered a more reliable early warning signal. If the Fed continues to raise rates by at least 50 bps in 2019, the inversion of this spread is expected with 100% probability.

• Recession Probability: While the yield curve inversion suggests a potential recession, the probability of a recession within the next 12 months is estimated at around 20%. However, a slowdown in 2019 and challenges in 2020 are anticipated.

• Cautious Interpretation: The document emphasizes the need for caution in interpreting yield curve signals. Factors such as changes in inflation expectations and improved Fed communication have altered the dynamics of the yield curve in recent years.

• CMBIS Ratings: The firm provides investment ratings, including BUY, HOLD, SELL, and NOT RATED, based on the potential return or loss of stocks over the next 12 months.

Key Information

• Yield Curve Trends: The yield curve has been flattening over the past 12 months, indicating a shift in market expectations.

• Historical Correlation: The spread between 10-year Treasury bonds and 3-month T-bills is highly correlated with the 1-year lagged real GDP growth rate.

• Market Reaction: The inversion has caused a sharp decline in US stock prices, reflecting market anxieties about the economic outlook.

• Investor Caution: The report advises investors to use the yield curve as one of several indicators and not to rely solely on it for decision-making.

Figures

• Figure 1: Illustrates the flattening of the US yield curve over the past 12 months.
• Figure 2: Demonstrates the correlation between yield curve spreads and 1-year lagged real GDP growth.

Disclosures

• Analyst Certification: The analyst certifies that the views expressed in the report accurately reflect their personal opinions and that their compensation is not tied to the report's content.

• Trading Restrictions: The analyst and their associates have not traded in the stocks covered in the report within 30 days prior to the report's release and will not do so within 3 business days after.

• Ratings Disclaimer: The ratings provided by CMBIS are based on the firm's analysis and may change without notice.

• Investment Risks: The document warns that investing in securities involves risks and that past performance does not guarantee future results.

• Conflicts of Interest: CMBIS may have investment banking relationships with the companies discussed, which could affect the report's objectivity.

• Distribution Restrictions: The report is intended for specific audiences, including major US institutional investors, and may not be distributed to others without consent.

Conclusion

The inversion of the US yield curve signals economic uncertainty and potential recession. While it is a useful indicator, its predictive power must be interpreted with caution due to changing market dynamics. CMBIS continues to monitor the yield curve alongside other economic indicators to provide informed investment advice.