Yield curves

There goes the 2s10s again. The spread is now negative in the US. It is a famous harbinger of recessions.

Not quite so pronounced in Australia, where the yield curve slope is sitting at ~90bps, meaning a) banks make a return to maturity transformation and b) that the RBA is not expected to crunch expected growth and inflation just yet.

Returning to the US, it is worth reminding ourselves that there are a few “slope” measures (e.g. 3m) and a few “adjusted for term premia” measures. Those are more benign, although it matters whether you pick an ACM or KW measure.

Just with your eyeballs you can see a time trend in the data above, which needs accounting for. Anyway, whacking all of those measures into a standard probit model yields everything from frightening to “keep calm and carry on”. Not tremendously helpful, perhaps….

but, as a counterfactual, it does at least give you pause to say, “huh, the inverted yield curve has some caveats that I should be aware of, and perhaps I don’t need to thunder out of all my equities”. From a risk management framework that is valuable information.


Across our multi-asset portfolios, we are sticking fairly closely to our strategic asset allocation weights. We’ve got a variety of tilts on, which we’ve talked about in prior notes, but these are relatively modest.

Now is not the time for a major tilt at any one thing or thematic. Instead, it is the time for diversification across asset and sub-asset classes, and geography.

As of today, we’ve added to our Australian government bond exposures within fixed interest. A 4% yield (see below, top left, in our constellation of asset prices graph) when the total return target of our Balanced portfolios is 6% strikes us as a good deal, and we will likely continue to add to those positions as yields climb.

I did want to close out the note by pointing to the commentary from the Bank of America CEO, out overnight, in which he comments that loan demand is still very strong, across consumer, across business lending, and I suppose that’s the point, the overarching narrative that we keep coming back to.

Growth is strong, that’s the good news, arguably too strong, that’s the bad news, and the Fed is trying to balance the two with rate hikes, and the market is worried that they will overdo it.

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