Last week’s yield curve inversion caught many investors by surprise, heralding the possibility of a new recession as the market reacted to this sign in fear. However, there have been many experts who’ve gone on to say the opposite and that a recession still is quite a bit away. Today, the head of the world’s largest bond fund said that investors shouldn’t worry too much from these yield inversions.
In an exclusive interview according to MarketWatch, Daniel Ivascyn, group chief investment officer of Pacific Investment Management Company (Pimco), went on to say that investors have become overly anxious about potential recessionary signals despite evidence that the domestic economy remains solid.
“Given where our employment rate is currently, [a recession], holding all else equal, shouldn’t be much of a concern,” he said. “When we look at the yield curve shape relative to our economic outlook, [the yield decline] is a bit overdone at least on the short-term.”
Aside’s from growth concerns, Ivascyn went on to say that other factors have led to the yield inversion when long-term yields fell below their short-term counterparts for the first time since 2007. In his eyes, a combination of technical factors alongside increased treasury demand helped an inversion form even through the tight labor market and global growth hasn’t reached warning levels that would indicate an end to this bull run. In conclusion, the Pimco said their risk of a domestic economic contrast in 2019 was minor despite some economic signs of weakness taking hold.
“So far, there are few signs that the global trade cycle has bottomed, and we see global growth still synching lower in the near term. However, we see a good chance that global growth will stabilize or even pick up moderately later this year. One reason for our cautious optimism is the easing of global financial conditions since the Fed’s dovish pivot,” read a PIMCO blogpost. “Another is that China has recently stepped up the pace of fiscal and monetary easing, in effect ‘flooding’ the entire system. These factors could enable a soft landing of sorts for the global economy – albeit with further air pockets along the flight path.”
One Nobel-prize winning economist recently echoed a similar sentiment. Robert Shiller, who is also a professor at Yale, is another skeptic to the supposed economic apocalypse that investors are worried about. In an interview with Bloomberg, he argued on television that much of the curve’s reputation is unjustified.
“I think personally that the inverted yield curve is overrated as an indicator. I think its success at predicting has diminished somewhat…The inverted yielded to some extent, is a product of what you call data mining. They say it works since 1957 for predicting recessions, so how many recessions have we had? You’ll find an indicator that does really well to predict them but won’t do as well in the future.” Shiller went on to add that it was absurd that the financial press didn’t pay much attention to the yields when they were hovering above an inversion for so long only to become a sensation once it finally crossed over.