‘Don’t get too gloomy’ or risk missing out after yield inversion

For all the grim Treasury-market warnings about the economy, history shows that stocks and bonds tend to do quite well in the window between yields flip-flopping and U.S. recessions.

That’s the conclusion of a Piper Sandler study going back to the mid-1970s and looking at Treasury inversions -- when short-term rates move above those with longer maturities. On Monday, five-year U.S. Treasury yields climbed above those on 30-year bonds for the first time since 2006. That came after earlier this month some other sectors on the curve inverted.

The fastest U.S. inflation in four decades is piling pressure on the Federal Reserve to act quickly and aggressively. Policy makers need to deliver a Volcker-style shock if they want to slow the surge in prices without causing a recession, Credit Suisse Group AG strategist Zoltan Pozsar said last month, referring to the way then Fed Chair Paul Volcker broke the back of inflation in the 1980s with massive rate increases.

The bond market is on course for its worst quarterly loss on record after the Fed began tightening policy this month and signaled the potential for more aggressive hikes. The central bank is also likely to announce the start of the run-down of its balance sheet possibly as soon as at its May gathering. Stocks, for their part, have done relatively well even with concern that a potential economic slowdown and rate hikes could hamper corporate profits.