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Redrick Terry:
It’s that time for 4 Your Money. We’re joined by David Nelson, CEO of NelsonCorp Wealth Management. David, welcome back.
David Nelson:
Thanks, Redrick. Appreciate it.
Redrick Terry:
Of course. So we’ve seen a lot of headlines recently about an inverted yield curve. What is that and what makes it so important?
David Nelson:
It’s a lengthy explanation. I’ll try to be brief as possible. Essentially, what takes place as you have the long end, which is long-term bonds. The interest rates, generally speaking there, are significantly higher as far as than the short term rates, and what happens is they essentially cross. It’s a rare event, hasn’t happened since ’07. Back in ’07, ’08, ’09, we had the stock market take a really, really big hit, so it’s not something that we want to go back to by any stretch imagination. But historically what takes place is on average 22 months prior to the market essentially rolling over, you have these types of events. I think our first chart here will will give us a nice visual, and I’ll have to bring people back to ’08-09 over here. We had interest rates on the short end. These are short term bonds. This is a 10 year bond, but we had interest rates at very low levels at that point in time, so now we fast forward to ’11. This was the Greece crises that we had. Europe was a a disaster in ’11, ’12, ’13, so interest rates were even lower at that point.
David Nelson:
Now we hit ’15 and we see that yields are starting to go up. The federal reserve has intervened to try to basically give back some of the cuts that they made as far as over here, and what we find when we look at the tail end here is that the two of them crossed. The 10 year went below the two year bond, and this is the inversion. Again, it’s not a guarantee that the market’s going to roll over, but historically this has been the case as far as this takes place. 10, 20, 30 months later that you have the stock market start to backpedal in pretty significantly.
Redrick Terry:
I know we’ve talked about it before, some other yield measures, so are some of the other things you are looking at telling you the same thing?
David Nelson:
Yeah, they really are. So slide two here is a little different look, so the bottom we’re looking at again interest rates. This is a 10 year, and the top we’re looking at high yield bonds. So a high yield bond is essentially the way that corporations and primarily corporations that aren’t really the highest grade, this is the interest that they’re paying. What we find again are these spikes that take place during periods of stress. Typically, the high quality stuff during periods of stress drop and high yield goes up, and what we find over here is that the spread has been actually quite tight, relatively speaking, and in recent times we’ve seen the yield drop pretty significantly here as this one has started to creep up. The high yield has crept up. So again, generally speaking, a very concerning event taking place where this is dropping and this is going up at the rate that they are probably indicating that we’re heading to a recession.
Redrick Terry:
Yeah, lots of figures there, so what should people make out of all of that?
David Nelson:
Don’t panic. Seek really good advice, and at the end of the day, I think John discussed this last week as far as the importance of sitting down and discussing your particular situation. Make good decisions. Do not let this make the decision, let this make the decision.
Redrick Terry:
Very good advice.
David Nelson:
Thanks, Redrick.
Redrick Terry:
Thanks, David, for joining us.
David Nelson:
Appreciate it.
Redrick Terry:
And if you missed any of our conversation, we will make it available to you on ourquadcities.com.
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