facebookUS Treasury Yield curve inversion just happened, is this it for the beginning of recession? what steps should I take to hedge myself against recessionary effects? - Seedly

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Anonymous

18 Apr 2019

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General Investing

US Treasury Yield curve inversion just happened, is this it for the beginning of recession? what steps should I take to hedge myself against recessionary effects?

Discussion (3)

What are your thoughts?

Hold up for now - there are times that the curve has inverted before that has not resulted in a recessionary effect after. The yield curve inversion is not a perfect indicator of recession.

In the meantime, perhaps if you are really scared you could look towards rotating from high growth Tech stocks into more defensive stocks (which are less affected by recessions such as Food staples, Healthcare, Utilities etc.) because these are products that people still consume even in times of recession. They are basic human needs.

Perhaps you could also look into buying into SG's Lt 10 year bond as well. An inversion of the Us yield curve may also mean alot more investors are starting to look towards hedging in their own home currency bonds, which mean that with higher demand, will lead to lower yields of these bonds. Locking in these bonds right now at a high interest rate will be a good boon in a time where stocks may not be paying dividends/ cutting yield, and you may see alot of your passive income drying up.

My take is don't try to predict the market but seek a balanced asset allocation and invest constantly in various asset classes such as stocks / bonds. That being said, a balanced asset allocation includes "cash" to be parked into 100% safe asset vehicles like Singapore Saving Bonds (SSB) whereby the principle is guaranteed regardless of market volatility and earns you interest higher than banks. This "war chest" funds can be utilized during a big crisis (eg 2008 sub prime crisis), by buying many undervalued stocks during that period of time. So how much to allocate as war chest? It depends on your age, risk profile etc. Just for info, Warren Buffett is currently holding 35 to 40% cash as he finds it hard to find undervalued stocks.

I am against the idea of holding big pile of cash waiting to invest only "at the right time", with that comes with huge opportunity cost. An example is end 2012, lots of genius analyst / gurus came out to talk about the fiscal cliff (google 2012 fiscal cliff), tech chartist talking about S&P double top and the news flooded with negative articles of a crash which did not happen. Nobody can predict the market but you can beat the market overtime by having a balanced asset allocation that suits your risk profile / comfort level into stocks, bonds, cash and maybe gold.

Nevertheless, here are some info on yield curve. Based on stats, for the past "50" inversions historically, 1 out of 50 time did not result in recession. Also it usually will not happen immediately, but on an average of 311 days after the inversion occurs. Also to caution that currently the US market is expensive base on the market cap to gdp (Warren Buffett favourite indicator) at historical high. In terms of valuation, the US market is pretty overvalued and you might want to consider stocks elsewhere. Checkout more on my blog engineerinvest.com

Hope it helps.

  1. Don't panic

  2. Relook at your assest allocation and its susceptibility to the next economic regi...

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