What The Bond Market Yield Curve Inversion Means For The Moguldom Nation

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Written by Dana Sanchez
yield curve
Bull or bear market. Image: Jenny Downing/Flickr

The yield on the benchmark 10-year Treasury note broke below the 2-year rate early Wednesday, a bond-market phenomenon that has since 1950 been an early but reliable indicator of economic recessions.

Treasury yield is the return on investment, expressed as a percentage, on the U.S. government’s debt obligations. It tells us how investors feel about the economy. The higher the yields on 10-, 20- and 30-year Treasuries, the better the economic outlook.

One of the best predictors of recessions, the yield curve shows the difference between the interest rate on short-term and long-term government bonds. When long-term interest rates fall below short-term ones, the yield curve is said to be inverted and a recession could follow.

This inversion was caused by the 30-year bond going to an all-time record low of 2 percent, meaning someone is willing to lend the U.S. Treasury money for 30 years and only get 2 percent-per-year in return for the money. That’s the negative for Moguldom Nation. The positive? If you’re thinking of getting a mortgage or borrowing money to do anything, rates are super low.

Tunde Ogunlana, family wealth advisor with Axial Family Advisors

In the past it has taken up to two years for a recession to follow a yield-curve inversion. There’s a one-in-three chance of a recession starting in the next year, according to a Federal Reserve Bank of New York metric — not far from where it was right before the Great Recession, New York Times reported.

Yield curve
Source: New York Times

The Trump-China trade war escalation, prolonged protests in Hong Kong and Chinese military build-up near the border with Hong Kong are stoking fears that something bad is about to happen. Add to that the shock election in Argentina that saw stocks fall almost 50 percent in a single day. There is also evidence of slowing global growth. The International Monetary Fund cut its global gross domestic product forecast for 2019, citing fallout from trade tensions.

Countries that are spooking investors include the U.S., the U.K., Germany, China, Brazil, Argentina, Italy and the island city-state of Singapore.

What does the yield curve inversion mean for The Moguldom Nation?

We reached out to finance and markets expert Tunde Ogunlana, a family wealth advisor with Axial Family Advisors, for advice for The Moguldom Nation.

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For The Moguldom Nation — younger, Black, brown and entrepreneurial — this may be your first recession where you have skin in the game. The new fear is that because the yield officially inverted on Wednesday between the two- and 30-year bond, a recession could be coming sometime within a window of one-to-two years, Ogunlana said.

“If we’re going into a period of slowdown, I’ve learned that perception and reality can be the same, and often the perception creates the reality,” Ogunlana told Moguldom. “So if enough people clam up and don’t buy houses — and they all do that at the same time, the perception that real estate is going to drop is going to create the reality.”

For the economy as a whole, if people stop making capital investments and banks start tightening their lending, people can’t expand and get the capital they need. There are cascading effects.

This inversion was caused by the 30- year bond going to an all-time record low of 2 percent, meaning someone is willing to lend the U.S. Treasury money for 30 years and only get 2 percent per year in return for the money. That’s the negative for Moguldom Nation.

The positive thing for Moguldom Nation is that the mortgage rates in the U.S. correlate with the 30-year bond and the consumer credit tends to correlate with the 10-year bond. Both are extremely low so if you’re thinking of getting a second mortgage or borrowing money to do anything, rates are super low. “There’s the yin and yang,” Ogunlana said. “We just don’t know how it’s going to play out.”

This week’s stock market decline affects the outlook negatively. Another thing to watch for is your 401K balance. It may start bouncing around a bit more. If you already know it’s coming, you may need to make some structural changes in your business now, Ogunlana said. For example:

  • Pay off debts so you’re not overextended with credit in a recession.
  • Hoard cash now.
  • Shore up your individual balance sheet with the personal business.
  • Consider selling investments with gains in order to have the liquidity to reinvest when prices are lower (buying the same shirt from Marshall’s for 50-percent off vs. the same shirt at Neiman Marcus)

How the wealthy get wealthier in a recession is by buying low because they have the liquidity (cash) to buy when everyone else is selling at fire-sale prices. “We saw most people last decade during the Great Recession unable to take advantage of the drop in stocks, bonds and real estate because they were themselves overextended and without the ability to take advantage of that,” Ogunlana said.

Here are more tips from a wealth advisor on preparing for a possible recession:

  • Don’t panic. Ride it out.
  • Leave your money in your 401K and mutual funds.
  • Take advantage of the downturn. If you’re thinking of buying your first home and you walk into a bank with an 800 credit score, they’re going to lend you money, most likely at a low-interest rate.
  • Make sure your credit is clean.
  • Really take the long view.
  • It’s OK to be scared. Throughout history, the stock markets have always rebounded over time. 
  • Make sure to keep your emergency reserves in cash at all time, separate emergency cash from investments cash. That will help you sleep at night if your investments do not perform in the short run.